An arm's length transaction is a sale where buyer and seller have no relationship or special circumstances that would influence the price. Both parties act in their own self-interest, negotiate freely, and the resulting price reflects true market value.
This concept is critical for property tax purposes because only arm's length transactions reliably indicate fair market value. Sales between family members, business partners, or under unusual circumstances (foreclosure, relocation, divorce) may not reflect what a property would actually sell for on the open market.
When gathering comparable sales for your protest, focus on arm's length transactions for the strongest evidence.
Understanding arm's length transactions helps you build stronger protest evidence AND identify when the appraisal district used bad comps against you.
When selecting your comps:
• Verify sales were arm's length
• Check for foreclosure or distress indicators
• Look for normal days on market
• Confirm standard transaction terms
When reviewing the district's comps:
• Question any that seem too high
• Ask if they verified arm's length status
• Point out any foreclosures or unusual sales
• Request they remove non-arm's length comps
A protest can succeed simply by proving the district used unreliable sales data.
Arm's length vs. non-arm's length sales:
Arm's length (use these as comps):
• Sale through a real estate agent to a stranger
• Normal marketing time on the market
• Standard financing and terms
• Both parties negotiated freely
NOT arm's length (avoid as comps):
• Sale to a family member
• Foreclosure or short sale
• Corporate relocation buyout
• Divorce settlement transfer
• Sale between business partners
• Estate sale to heir
• Seller financing below market rate
Non-arm's length sales can be higher OR lower than market value—they're simply unreliable indicators.
Look for red flags: short time on market, sale price far from asking price, same last names on buyer/seller, foreclosure or short sale designation, or corporate/institutional buyers. MLS data and county records often note transaction types.
They shouldn't—foreclosures aren't arm's length transactions. If the district used foreclosure sales to justify your value, challenge this in your protest. Point out that distressed sales don't reflect fair market value.
Your purchase price may not be accepted as evidence of fair market value since it wasn't arm's length. You'll need to use other comparable sales to support your protest. However, if you paid full market value, you can explain the circumstances.