How Much Is Substantially All (Test #2)

By Jason Watson, CPA
Posted Saturday, October 10, 2026

Before we get too far, what does “substantial” even mean? In legal usage, the word generally conveys something real, material, important or considerable, rather than nominal, trivial or insignificant. It sounds precise, right? It is not, and using four words that all mean the same thing doesn’t help. Its meaning depends heavily on context.

Add the word “all,” and we get closer. “Substantially all” generally means nearly all, but still not necessarily all. How nearly? That is where the fun starts. Tax law uses the phrase in several places and sometimes supplies an actual percentage. Here, the Treasury did not.

Material Participation Test #2 says your participation must constitute substantially all of the participation in the activity of all individuals, including people who do not own a lick of the property or activity. What the regulations do not say is how much is substantially all. There is no percentage. There is no hour count. The IRS Audit Techniques Guide notes the same problem: no specific number of hours is associated with this test, and the term substantially is not defined.

Neat.

You will hear practitioners toss around 90% or 95% as the safe zone, and those numbers are not bad. However, there is no regulatory or judicial basis for treating either one as the line. The code authors clearly knew how to write a number into the material participation tests and did so elsewhere in the same regulation. Treasury Regulations Section 1.469-5T(b)(2)(iii), for example, expressly bars anyone with 100 hours or less from using the facts and circumstances test. Test #2 has no such limit.

This matters because, among the common current-year participation tests, Test #2 is the only one with no minimum hour count. If you spend 40 hours on your rental and the only other participation is a plumber for 1.5 hours and a handyman for 2, you performed roughly 92% of everything anyone did. That appears to be a defensible position, and the low absolute hour count is largely beside the point. Some rentals just do not require much work, right?

Here is where it breaks. In Bugarin v. Commissioner, Tax Court Summary Opinion 2013-61, the court examined the taxpayer’s log for one property and determined that 45 hours were associated with that rental property. It then found that at least 20 of those 45 hours involved the participation of other individuals who were not owners. That wording matters. The court did not say the taxpayer personally performed only 25 hours while non-owners performed the other 20. The 20 hours were included within her 45-hour log and apparently represented activities in which other people also participated.

The court found that the taxpayer’s participation was not “substantially all” under Test #2 because too much of her logged time involved third parties. She failed material participation for that activity. Bugarin does not establish a clean percentage threshold. It simply tells us that having other individuals involved in at least 20 of the taxpayer’s 45 logged hours was enough to fail the test. Treat it as a caution, not a formula.

As a practical matter, the proof problem sits with the taxpayer. In Pohoski v. Commissioner, T.C. Memo. 1998-17, the court made clear that a taxpayer who uses a property manager cannot satisfy Test #2 simply by logging their own hours without also putting forward some evidence of the hours the manager spent. Said differently, the comparison cannot be one-sided. The message from both cases is the same: the proof problem is yours, and half the proof is knowing what the other side put in.

Where does WCG sit with all this? If you can get past 100 hours while the rest of the world stays near zero, do it. At 101 hours against 5, you satisfy Test #3 outright and never have to litigate what substantially all means. However, if you have 90 hours and others have 5, we would call that substantially all. Need a number? We start paying close attention once your share drops below about 80%. That is not a safe harbor, a regulation, or a court-created line. It is simply where we stop relying on the percentage alone and start looking much harder at the facts.

A word of caution, though. Getting past the substantially all test on the math does not mean you have cleared the statute. IRC Section 469(h)(1) defines material participation as involvement in the operations of the activity on a basis which is regular, continuous, and substantial. Using our example above, 40 hours spread across one weekend a year is a harder story to tell than 40 hours spread across 40 weeks, even if the ratio looks fine on paper.

Yeah, that didn’t help, did it? How about-

Others’ hours in rows 1 through 3 reflect aggregate participation across all individuals for Test #2 purposes. Row 4 reflects a single individual’s hours for Test #3 purposes.