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Arm’s Length Transaction

By on October 12, 2018

An arm’s length transaction describes a real estate transaction that occurs between two unrelated parties.

This implies that both buyer and seller are negotiating for a deal while acting on their own best interest.

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The buyer wants to get the lowest price at the best value while the seller wants to get the highest possible price as close to market value as possible.

If the two parties are related in some way, it comes into question whether an agreed transaction was an arm’s length transaction.

The IRS is particularly interested in this classification as a deal between related parties way below market price can be deemed as gift related, and therefore subject to gift taxes.

Relationships that are often deemed to not be at arm’s length are:

  • Siblings
  • Parents and children
  • Parent company and subsidiary
  • etc

When conducting such deals it is best to consult the advice of a qualified accountant for more clarity.



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