In a related party transaction the related individuals may be able to work together to set the property below or above fair market value to their tax advantage. However, in a non-arm’s length transaction it is not always relied on that fair market value was used. ITA 248(36) states that fair market value should be applied to the transaction of the property. Why is the government concerned about non-arm ’ s length transactions? ITA 251(2)(a) describes related persons as “individuals connected by blood relationship, marriage or common-law partners or adoption” with 251(6) elaborating on what is meant by “blood relationship”. Non-arm’s length transactions can still close smoothly and on-time with cooperation and proper disclosure by all involved.CRA defines a non-arm’s length transaction as “a relationship or transaction between persons who are related to each other.” Since the affidavit regarding an arm’s length transaction is a legal document requiring the signatures of both parties, it is critical to answer the question truthfully! The transaction will then be handled as such to comply with all applicable laws. Reporting of capital gains may vary as well. For example, taxes might be calculated on appraised value rather than sales price. However, the sale could be treated slightly differently. Sales that involve related parties are certainly legal and take place all the time. Additionally, the seller will be reporting less profit on the sale, which again could result in lower capital gains taxes. In this case, the municipality will collect less in transfer tax dollars. For example, in a real estate transaction among family members, it’s possible that one relative might sell a home to another for much less than market value. When a transaction is not arm’s length, the price could be more or less than market value. When a transaction is arm’s length, we can assume that the agreed upon sale price is a reflection of current market value. Other things then rely on that value, such as municipal transfer taxes and federal/state income taxes. These two opposing forces create a balance that determines market value. Sellers obviously want to sell for as high a price as possible, and buyers want to negotiate the lowest price possible.
In real estate, market values are determined by buyer and seller actions/motivations. Why Arm’s Length Transactions in Real Estate is Important For instance, two parents who are merely part of the same PTO group would be arm’s length, but two people who are investors in the same company would not be. However, two people who simply know each other can still be arm’s length, so long as neither can benefit financially from the actions of the other. Thus, one family member selling a home to another would NOT be arm’s length. Essentially, an arm’s length transaction involves two independent parties looking out only for their own interests. One party does not have an interest in or benefit from the actions of the other. When something is arm’s length, it means that the parties involved are not related in any way.
Here’s a quick overview of arm’s length transactions in real estate for Massachusetts home buyers and sellers. Before answering, it is important to understand what it is and why it’s even asked in the first place. Your answer is legally binding and could have certain implications. When buying or selling a home in Massachusetts, you will be asked whether the transaction is arm’s length.
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