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My web server sends a 404 header when any nonexistent page is hit and I had assumed this meant Google would handle the page differently and not treat it as dup content. I have many pages which are still spidered which do not exist on my site anymore due to redesigns and updates. My concerns are that my homepage is getting a dup penalty and/or that my site is flagged as a site with multiple duplicate pages because the same custom 404 page(which is an exact copy of my homepage) is served for all nonexistent pages.
I see that none of the top results I have checked are handling 404's this way. Most have no system for serving html pages for 404's and I get the standard browser error. Some do a server-side redirect to the actual homepage.
What is the absolute best way to handle 404's from a stand point of maximizing my ability to score well in Google for my homepage and existing pages?