The new Lionchief diesels are probably what you're looking for if you want something new to run. They are nice looking with the option to run conventional or from an app on your phone. They can also be ran command control with a Cab2 or Cab1L but you'll probably be into that later on. You can probably pick up a cheap engine online somewhere. The price isn't terrible to start with for what you get if you did order new.
If you're good with running conventional, you can definitely find a cheaper Lionel diesel to run. I would look for something after 2005 but if you can score a postwar engine, it'll definitely stand up to all the abuse young hands can dish out.
As far as what you got, I'm not knowledgeable on what's under the hood of that K-line engine but my experience with older engines is that cleaning and some lube will bring them right back to life. No doubt somebody more knowledgeable will come along on here with a specific solution. I would flip the engine over and look for some screws to get the body off. Then see what you're dealing with. Maybe post some pics here!
