House Flipping + § 121 Exclusion of Gain on Personal Residence

[Dan M.]

Hello all!

I'm a (somewhat) recent college graduate with a degree in management accounting.  Contrary to my degree, I've started a professional career in tax accounting.  My fiance and I are both sick of flushing ~$1,000 each month on rent, so we're looking to buy a house.  Unfortunately, student loans from PA are brutal, so neither of us have a ton of cash to fork over.  We were thinking of finding something smaller that would suit our needs here in FL (potentially putting $10-$20k down on a house in the $80k-$150k range).

Since I'm working in tax, I'm very fond of our little friend, 'Mr. Section121', which allows us to exclude a gain of up to $250/$500k (single/married) on the sale of personal residence that we've lived in for 2 years or more.  That being said, I plan on rehabbing the home over the course our inhabitance and hopefully selling it for a small gain (that we can use to purchase our next home).

I've been told by a few people that the expenses I'll incur will likely outweigh or cancel out any potential financial benefit, but I'm pretty darn good with money and I'm also looking forward to learning about real estate and homes in general.  

I've never made a purchase of this magnitude before, and I know very little when it comes to real estate financing--so I have a few questions/uncertainties that I'd like to address.

Allow me to set up a rough example just for fun:  Let's assume I put $10k down on a $100k house with a 30-year mortgage.  As soon as I 'close' on the house, it becomes 'my property', correct?  So now that I technically own it (and the bank just has a mortgage on it), am I allowed to tear out and replace the outdated fixtures, upgrade the plumbing and electrical, etc.?  If so, is the bank concerned about what I do to the house, or are they just after the almighty dollar?  In my head, I'm playing out two different scenarios. 

Scenario 1: I fix up the house for $10k and sell it for $125k 2 years down the road.  How do I go about physically selling the house?  Do I have to hire a realtor or get some kind of pre-approval from the bank that loaned me the money?  If someone pays me $125k in cash, I'm assuming it would just be a matter of getting the title transferred to him/her and then I'd be responsible for paying back my debt to the bank.  But there has to be all kinds of fees and costs associated with closing on a house too, right?  So there goes some more of my profit.  How does the process differ if the buyer also needs a loan/mortgage in order to complete the purchase?

Scenario 2:  I attempt to fix the house, but end up reducing the value because I'm an idiot. Because of this, I can only sell it for $80k.  Someone pays me the $80k, but I still owe the bank $90k!  What happens then?

In advance, I'd like to thank you for helping me out with this.  Even if you don't feel like putting forth the effort to educate me, perhaps you could suggest a great book, or refer me to something else that can educate me.  I plan to join the real estate niche at our accounting firm soon, and don't want to look like a fool in front of everyone else when they realize how little I know about the real estate sector.