The boy, now aged 13, pleaded guilty to one count of rape, two counts of indecent assault and one count of inciting a child to engage in sexual activity.
In a statement, he explained that he was "disgusted" with his actions against his sister - which occurred between between March and May last year - and promised it would not happen again.
Sentencing him at Blackburn Youth Court, District Judge James Prowse said he thought it "highly improbable" that the boy would reoffend in this way as he followed the recommendations of a Youth Offending Team to impose a 12-month referral order.
Detaining him would "tear the family apart" and expose him to "hardened and sophisticated" youth offenders, the judge added.
The judge also told the boy: "I think it is highly improbable that you will do anything like this again. You do not represent a danger to society.
"You yourself realised what you had done. In your own words you felt disgusted with yourself."
The boy is currently living away from the family home but, in a victim impact statement, his little sister said she missed him and wanted him to return.
"I feel sad what [the defendant] did.
"I want him to go to our house so I can play games with him. I love [the defendant]."
The boy will work with a social worker and will be placed on the sex offenders register for two and a half years.