You are correct in your understanding: “do not judge” refers only to the soul, not the action. In some cases, I believe, it is even possible (nay, necessary) to go beyond the act and judge the motive. An example might be if another woman were telling me lies about my husband’s fidelity, and I knew them to be lies, I could then not only judge her act (lying) to be a wrong, but also judge her motive (jealousy, spite, revenge, what have you) to be wrong. And if this person were a close acquaintance, I would very much need to discern her intentions in order to protect myself from harm!
So the argument that one should not judge anything but an action is also not always correct.
A key point to keep in mind, as well, is that many people confuse the act of judging with “judgmentalism.” But they are not the same. As I understand it, judging something simply means weighing it and making a determination as to its nature. Judgmentalism implies “sitting in judgment” over a person, feeling or acting superior, and condemnation.
It is important to note that one may judge a persons actions or motives to be sinful *without being condemning. *And the perfect example of this would be the way Jesus responded to the woman caught in adultery. Did he tell her what she did wasn’t wrong? Of course not. He told her the plain truth about her sin, but then he forgave her and directed her to “go and sin no more.”
An obligation to Truth requires that we acknowledge a sin for what it is, such as what we do with homosexuality, much to the indignation and outrage of the worldly. It would be a deception and a disservice to humanity not to call a sin a sin. However – and here’s the key difference between what Jesus did and what some people would do – we do not condemn the homosexuals for their acts. 1) We recognize that only God Almighty can condemn a soul. 2) We do not wish to see any soul condemned, rather we pray for that soul that it might be redeemed. 3) We understand that the degree to which we condemn another for his sin we seal our own condemnation for ours. We, too, have offended God, and we, too, must beg his mercy.
This is, as far as I can tell, the proper understanding of “do not judge.”