Where was the $100,000 when your parents filed that FAFSA? Are you saying that they got $100,000 when they sold,the house…but it was underwater? That doesn’t make any sense.
It sounds to me like your parents had a gain of $100,000 on that rental sale. No, it might not have been netting them money… but if the sale price was $100,000 more than what they owed on it…they got $100,000…right?
You can appeal to the schools for a professional judgement. They might consider one.
But if your “income” for the year including the rental sale and their regular income was $200,000 in total…you might not get too far, PLUS if that $100,000 was in the bank when you filed your FAFSA…it would have been an asset,
You say the money went to fund another home? Did your parents put that money into,their primary residence? That was their choice to do so.
In terms of taxes…they owed those back taxes. So they had to pay them.
If this is all that problematic…take a gap year…and apply for 2018 admission when your 2016 tax year will be used.
Are you applying to colleges that meet full need? If not…this could be lot of brouhaha for no net financial aid gain.