so I think I understand why I am incorrect. I wrote 私の姉は外です。which I see now probably more closely translates to meaning my sister is literally the outside as in she embodies the outside. is my thinking correct?
According to my Japanese wife 外に姉がいます is never used in Japanese. It doesn't really give a different nuance or meaning than 姉は外にいます, but it simply sounds incorrect to her ears. The only correct word order / answer in this case should be 姉は外にいます。
I came looking for same answer. @Aramedori said something like "that would mean something along the lines of "my older sister is the living embodiment of 'outside". I think that makes sense. That's why が is needed here.