Arm’s-length Transaction

A transaction in which the parties are dealing from equal bargaining positions. Parties are said to deal “at arm’s length” when each stands on the strict letter of her rights and conducts the business in a formal manner without trusting the other’s fairness or integrity and without being subject to the other’s control or dominant influence (as is sometimes the case in transactions between family members). The absence of an arm’s-length transaction may give rise to tax consequences when property is transferred at less than fair market value. Whether a transaction was at arm’s length is also relevant to the “willing-buyer, willing-seller” concept in the estimation of market value.