"Just to clarify, you're not saying that a buyout on inherited property from a sibling is considered gross income for income tax purposes correct?"
Everything is income, the question is whether it is taxable, and whether you have to report it.
"And to your point if it's considered personal property then why wouldn't it qualify as a capital loss?"
It may be a capital loss, but you can't take a tax deduction on a capital loss if this was personal property.
"I'm not even sure what type of property this would qualify as, I did not live on the property but I also collected no rent so is it considered personal or investment in the eyes of the IRS?"
This is an important question. There is some argument that, if you inherit a home from a relative, and do nothing more than fix it up, clean it out and sell it, then you can treat it as investment property. Since the selling price so soon after death is probably the fair market value (FMV is defined as the price a buyer is willing to pay a seller in an open sale, an appraisal is just an estimate), there is a small capital loss when you account for the real estate commission, and I have seen it argued that if you sell an inherited house, and never lived there, and only cleaned it out to sell it, you can take that small capital loss created by the real estate commission and use it to your benefit. I don't know if it is a universally agreed upon concept, but it is a common argument.
However, while you are under no obligation to sell for the highest possible amount, there are problems if you sell something to a relative at a below market cost, and then try to take the loss as a tax deduction. It's a back door way to deduct a gift, which is not allowed. (In other words, if you could sell to a stranger for $50,000, but you sell to a relative for $40,000, you are giving the relative a $10,000 gift. You can't take a tax deduction for a cash gift, so you should not be allowed to take a capital loss for the amount you gifted to the relative.)
So even if you want to go by the argument I first mentioned, that this is investment property to you (given the circumstances, even if your sibling is living there as their personal home, it might be an investment for you), then you have the issue of the gift of equity, and how that affects your ability to deduct a loss (which exceeds my knowledge on this topic).
