Yes, you would offset your ordinary income by the total loss.

Is there a patio or back yard space?

Garage will only be used for the storage of ordinary household items.

Your CPA is probably referring to the net passive loss allowance (IRC § 469(i)(8)) that sets a $25K limit on the amount of net passive losses you can take against other ordinary income.  

Few questions - Is this quote based on total construction area (including garage, patio etc) or just calculated livable area.

The deed would have been put into your name from the very start (assuming this is an ordinary transaction, not a "contract for deed".)

Often the contracts sent to title companies are bare boned when subject to financing, owner financing, or anything out of the ordinary is included.  

So I just started Airbnb with a property and I had a message from a potential guest asking if it's okay if they smoke on the patio even though the listing says no smoking.

If your rental property generates a negative cash flow, then every dollar you lose on the investment each year (up to $25K annually) could potentially save you 25¢ in taxes on your other ordinary income -- up to a point.  

The 1/1 already has a nice private patio on the front side, and it seems like all this extra space in the back is a bit of an overkill for a smaller unit.