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.

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.

References in periodicals archive ?
An arm's-length transaction may be defined as a transaction between two or more independent, unrelated, and well-informed parties looking out for their individual interests.
The BOR disregarded the actual sale price from the sheriff's sale because, in its view, the sale was not an arm's-length transaction.
* A partner's sale of a significant partnership interest in an arm's-length transaction;
The definition of a flipped property is a home that is sold in an arm's-length transaction for the second time in a 12-month period based on publicly recorded sales data.
The transaction is an arm's-length transaction and no finder's fee is payable in connection with the agreement.
One of the policies intended to keep Fannie and Freddie in an ''arm's-length transaction'' prohibits property sales to nonprofits who resell to the original homeowner.
In the trial court's view, these mechanisms gave the buyout the characteristics of an arm's-length transaction with an actual third-party purchaser and, thus, warranted the more deferential standard of review typically applied in such cases.
Ironically, under the rule change that generated the original lawsuit, a stranger could purchase a reverse mortgage home for the fair market value (an "arm's-length transaction," according to the original Mortgagee Letter), where an heir could not.
Consequently, the court said, it did not need to determine the third factor, whether the restrictions were comparable to those of a similar arrangement entered into by persons in an arm's-length transaction.
Counterfactual experiments show why cross-border transmission may be much higher for a multinational transaction than for an arm's-length transaction. In the structural model, firms' pass-through of foreign cost shocks is on average 29 percentage points lower in arm's-length transactions than in multinational transactions because the higher markups from a double optimization along the distribution chain create more opportunity for markup adjustment following a shock.
If, in a commercial arm's-length transaction, the recipient of a payment is taxed on an income basis, TEI believes it would be appropriate to permit the purchaser to treat the payment as an expense on income account.
In Bongard, the IRS argued that this was not an arm's-length transaction since one could not occur between related parties.