There would be no difference between owning the property personally or as a sole proprietorship. They are treated the same for tax purposes and you would be held personally liable in both cases. You would report the income/expenses on your Sched E and would be taxed on your personal return. Depending upon your tax situation - if you are in an Alternative Minimum Tax (AMT) situation - you may not be able to take full advantage of all your losses, as they would be reduced by the AMT.
If you are in AMT you may consider forming an S-Corp. That way the corp can own the rentals and you would be able to take advantage of all the expenses. The income/loss would flow through to your personal return and avoid the double taxation situation of a regular C-corp. The S-corp (as well as a C-corp) would also provide you limited liability, not realized by the sole proprietorship.
The tax question has become an issue primarily with the long-term possibility, since I've already started doing some leg work for potential partners and would like to start deducting these expenses as soon as possible.
If you went ahead with the investment you could take the “leg work” expenses as start-up costs, and depending upon how much they are, you may get by with expensing them all in the first year, or possibly may need to amortize them. However if you do not go ahead with the business, then it depends upon how aggressive you want to be in taking these expenses as “investment” expenses on your personal return.
The AMT angle was one I hadn't even considered -- this is something I need to look into.
One thing I've already started doing is keeping good records for tax purposes, so I can start deducting these exenses for this tax year.