arm's-length transaction

Arm's Length Transaction

A transaction in which the buyer and the seller have no significant, prior relationship. In an arm's length transaction, neither party has an incentive to act against his/her own interest. That is, the seller seeks to make the price as high as he/she can, and likewise the buyer seeks to make it as low as he/she can. The negotiations for an arm's length transaction result in the arm's length price, which is almost always close to the market value of the asset being sold. The term is often used in real estate transactions because family members often sell property to each other at something other than the arm's length price.

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arm's-length transaction

A transaction in which the parties have equal bargaining strength in order to protect their individual interests and are not related or involved in some other type of relationship that would tend to call into question the fervor with which they attempt to protect their interests. If the IRS determines that a sale of real estate was not an arm's-length transaction for fair market value,it may deem part of the value of the property as a gift,which could result in gift taxes.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.