Is it truly HT bypass

It's actually full-range to the L/R speakers that presents the problem. The JL Audio software lets you put a low-pass filter on the subwoofer.

But one of the benefits of a subwoofer is that your main speakers would no longer have to deal with trying to reproduce low frequencies that they aren't suited towards reproducing. Asking the main speakers to reproduce those frequencies will result in distortion at higher listening volumes. Adding a subwoofer and a crossover takes that problematic job away from the main speakers.

It sounds like you heard that improvement when you set 120Hz and below to the f112 and everything else to the VR4 speakers.

The Von Schweikert VR-4 speakers may claim a 20Hz - 20kHz ±3dB frequency response, but I'm pretty confident that is not at the same output levels of the JL Audio f112, and probably not as flat either especially since the JL adds room optimization.

That being said, you're probably not listening as loud for stereo music (i.e. less vehicle explosions, but maybe some 1812 cannons), and taking the subwoofer out also avoids any potential time delay differences between the L/R speakers and the subwoofer (which would be adjusted for with the AV7705 distance settings).

It is still possible to share the subwoofer. Either as described with the full-range audio going to both L/R speakers and subwoofer, or if you have a crossover, like the JL Audio CR-1, inserted after the DAC2.

Thank you nekoaudio. You are very knowledgeable and you raise a very good point ( And that you're currently okay with the fact both the L/R speakers and the f112 are receiving the full-range audio) - it's probably not a good set up in the audiophile world to have full full range audio going to the subwoofer. Since my Von Schweikerts VR4 can handle full range I should probably not introduce f112 for stereo listening.  

I had benchmark DAC1 set up in the calibrated mode and used the Marantz analog to route anything under 120Hz to f112 and everything else to the VR4 - and that brought the mids to life with better soundstage. I really enjoyed that. I was told or maybe I misunderstood that the DAC2 having the HT bypass mode would be the perfect solution for being able to use the DAC and watch movies without switching. But never understood that for stereo 2.1 listening (using DAC2 preamp) and watching movies there is no 'sharing' the subwoofer. 

Correct. HT bypass means the volume control is disabled and instead there will be unity gain. It doesn't necessarily mean the DAC2 circuitry is being bypassed, although with some electronics a majority of circuitry will be bypassed.

For the following, I am going to assume you have one set of DAC2 analog outputs connected to your W5 and the second set of DAC2 analog outputs connected to your f112. And that you're currently okay with the fact both the L/R speakers and the f112 are receiving the full-range audio.

If you want to have the subwoofer work both through the AV7705 and when only using the DAC2, then you probably need to configure the AV7705 with no subwoofer, and tell the AV7705 to route all LFE and the lower frequencies of your center and surround speakers to the main L and R speakers.

Ideally, you would have a crossover somewhere for the L/R speakers and the subwoofer, so the subwoofer gets the low frequencies and the L/R speakers get the high frequencies. Especially for movies. But I'm not aware of the DAC2 having that functionality. And most of the time placing a preamp that crossover functionality into HT bypass disables the crossover.

@nekoaudio thanks for the response. In that case I am bypassing the preamp functionality of the DAC totally - right? But I do want to use the DAC2 preamp for 2.1 stereo playback and yet find a way when playing movies to leverage 5.1 - not sure how to. Maybe I have this whole thing wrong and confused. 

Normally you would have the subwoofer connected to your AV7005, and then analog L/R from the AV7005 into the DAC2 with HT bypass set for that pair of analog inputs.