SSHFS can only delete files in terminal, but not with nautilus
 

This is crazy I issued the command:
sshfs root@iPhone:/ ~/iPhone

Than entered my ssh password for the iPhone and it works great int the terminal I can add/modify/delete whatever.

Now here is the weird part:
In nautilus I can't delete anything in the root directory of my iPhone, however if I go into ANY subdirectory from the root I have full control to do anything. I just can't delete files off the root.

All of my permissions are right and as stated earlier, I am able to delete files off the root directory via terminal, but no luck with nautilus (only in root of iPhone).

It sure seems like a permission problem. Obviously, when you log in via a terminal you know whose permissions you have. Are you logged into your Nautilus session as root too, I.e., not a regular user account?

I would look at the permissions for the files/directories from the terminal to see what the differences are. Post them here if you want someone to look at them.