Answering my own question here. It is because the depreciation on the original structure is considered "unrecaptured Section 1250 Gain." This article explains it well:
https://www.investopedia.com/terms/u/unrecaptured-1250-gain.asp#:~:text=An%20unrecaptured%20section%....
I was unaware that the depreciation on the original house structure is considered a capital gain and can be offset by other capital losses. According to the article, that is the case.
It's interesting to me that the improvements I made over time are considered personal property, are classified as Section 1245 property, and therefore the depreciation is taxed as ordinary income rates and cannot be offset by capital losses. But the original house structure is considered residential real estate, is classified as Section 1250 property, and therefore the depreciation is treated as a capital gain that can be offset by capital loses and is subject to its own separate maximum taxation rate. I don't understand why it should work this way, but it does appear to be the case, based on what I have read.
