MATERIAL PARTICIPATION · TEST 2 OF 7
The Substantially-All Participation Test
No hour minimum, no comparisons, no lookbacks: if your participation constitutes substantially all of the participation in an activity for the year, you materially participate. This is the test for the owner who does essentially everything themselves.
What the test requires
Under Reg. §1.469-5T(a)(2), you materially participate when your participation makes up substantially all of the total participation in the activity — including participation by people who are not individuals, such as employees or contractors. There is no fixed hour threshold. If you are genuinely the only person doing the work, or your contribution dwarfs everyone else's, this test can be met with far fewer than 500 hours.
"Substantially all" is not defined by a bright-line percentage, which makes documentation especially important: you need to show not just your hours, but the full picture of who did what.
Who this test fits
This test fits solo operators: the Airbnb host who cleans, messages guests, restocks, handles maintenance calls and does the books with no cleaner, no co-host and no manager. It also fits owners of a single small rental where one person truly does everything. If anyone else performs meaningful work in the activity — a regular cleaner, a handyman on retainer, a co-host — this test becomes harder to claim. It is often the realistic route for an owner who places a short-term rental in service late in the year, with no time left to reach 100 hours; see buying a short-term rental in December.
It also fits the owner-occupant edge case: you live in one unit of a small multi-unit property and personally handle nearly everything — tenant relations, common-area upkeep, bookkeeping — with only occasional outside help. Your proximity makes the solo-operator story natural, but the documentation burden is the same: show your hours and the thin file on everyone else's.
What counts as participation
Everything you do in the activity counts, measured against everything anyone does. That includes the hours of employees, contractors and managers, so keep a realistic picture of third-party work too. As with the other tests, pure investor activities generally do not count unless tied to day-to-day management. The question the test asks is simple: of all the human effort that went into this activity, was substantially all of it yours?
How to document it
Because there is no hour target, your log needs to tell a complete story: what you did, when, and — just as important — what little anyone else did. Log your work contemporaneously in PropHours, attach receipts and photos, and keep records of any contractor or cleaner invoices so you can show third-party involvement was minimal. A year-end export that shows hundreds of your entries against a handful of contractor invoices is exactly the shape of evidence this test wants.
Common mistakes
Ignoring other people's hours. The test compares your participation to everyone's. Forgetting the cleaner's weekly visits undermines the claim.
Assuming "I do most of it" is enough. "Most" and "substantially all" are different standards — be honest about the split.
No records of the negative. It is not enough to log your hours; keep the thin file on what others did too.
Counting group or volunteer help as "not real" participation. If a family member regularly helps with turnovers, that is participation in the activity whether or not money changed hands. Document it honestly; the test measures all participation, paid or not.
Real-world example
Dan runs a single Airbnb out of his duplex in Denver. He has no property manager and no co-host. His year looks like this:
- Dan's own work: guest messaging, turnovers he does himself between bookings, restocking, minor repairs, dynamic pricing, monthly bookkeeping — about 380 hours for the year, all logged in PropHours with timestamps.
- Cleaner: a cleaner comes for deep cleans four times a year, about 6 hours each — 24 hours total. Dan keeps every invoice.
- Handyman: one plumbing repair and one appliance installation — 9 hours total, invoiced.
Dan's share of all participation is roughly 380 of 413 hours — over 90%. There is no hour threshold to clear; the question is the share. His year-end export tells the story the test asks for: hundreds of his own dated entries against a thin file of third-party invoices. An examiner can see at a glance that substantially all of the work was his.
The honest accounting of the cleaner's and handyman's hours is what makes Dan's claim strong. Hiding third-party work is the fastest way to lose credibility on this test — the regulation explicitly counts participation by non-individuals in the comparison, so Dan documents it instead of ignoring it.
What the IRS says
The substantially-all test comes from Temp. Reg. §1.469-5T(a)(2): you materially participate if your participation constitutes substantially all of the participation in the activity during the tax year — and that comparison includes participation by individuals who are not the taxpayer, such as employees, contractors, and managers.
Notably, the regulation sets no hour minimum and no percentage. “Substantially all” is a facts-and-circumstances judgment about the share of total effort, not a bright line like 90% or 95%. In practice, that vagueness cuts both ways: a genuine solo operator can qualify with a few hundred hours, but anyone with meaningful help — a regular cleaner, a co-host, a manager — faces a much harder argument.
Because the test is comparative, your records need two sides: your hours and a realistic accounting of everyone else's. Contractor invoices, cleaner schedules, and co-host agreements are as much a part of the evidence file as your own log.
How many hours do I need for the substantially-all test?
There is no minimum. The test compares your share of total participation, not your absolute hours. In practice, solo operators often log a few hundred hours — but the ratio is what matters.
Can I use this test if I have a cleaner?
Possibly, if your participation still constitutes substantially all of the total. A cleaner who comes biweekly while you do everything else may be fine; a full-time manager is not. Document both sides honestly.
Does contractor work count against me?
Yes — participation by non-individuals counts in the denominator. Occasional contractor work for specialized repairs is normal; just keep the invoices so the totals are clear.
How is this different from the 100-hour test?
The 100-hour test requires more than 100 hours and at least as much as any other individual. The substantially-all test has no hour floor but demands a much larger share of total effort.
Is there a percentage that counts as “substantially all”?
The regulation does not set one. Think of it as a judgment about whether anyone else's contribution was more than trivial or incidental. If a second person does a meaningful share of the work — regular weekly cleanings, ongoing co-hosting — most practitioners would steer you toward a different test rather than argue the percentage.
Does my spouse's work help or hurt this test?
It helps. Under §469(h)(5), your spouse's participation is generally attributed to you, so a couple running the property together combines their share against outsiders rather than against each other.
Can I use this test if I have a co-host?
Probably not, if the co-host does meaningful work. The test compares your participation against everyone's, and a co-host's hours sit on the other side of that comparison. The 100-hour test or the facts-and-circumstances test may fit better — discuss the facts with your CPA.
Logging checklist for the substantially-all test
- Log your hours and theirs. Keep every contractor invoice, cleaner schedule, and co-host agreement — the comparison needs both sides.
- Describe the work, not just the time. "Replaced faucet cartridge, 1.5h" beats "maintenance, 1.5h" when the share of effort is the question.
- Note who did what, when. If someone else did meaningful work in a given month, your log should reflect it honestly rather than omit it.
- Review the ratio quarterly. If third-party hours are creeping up, you will see the share shifting before year-end — while you can still adjust or pivot tests.
- Export the two-sided story. Your annual report plus the third-party file, side by side, is the complete exhibit.
The other six tests
Browse all material participation guides.
Material participation requires meeting only one of seven tests: the 500-hour test, the 100-hour test, the significant participation activity test, the 5-of-10-year test, the personal service activity test, and the facts-and-circumstances test. Also see our free STR loophole calculator.
This page explains the substantially-all test under Reg. §1.469-5T(a)(2) in general terms and is not tax advice. Whether you materially participate depends on your facts; review IRS Publication 925 and consult a qualified tax professional. PropHours records the work you log — it does not determine tax eligibility.