The Substantially-All Test Under Temp. Reg. 1.469-5T(a)(2)

Test 2 mechanics

Test 2 compares the taxpayer's hours against the total participation of all individuals in the activity (including paid contractors and unpaid helpers). 'Substantially all' is a quantitative comparison.

Solo-operated activities where the taxpayer does all the work clearly pass. Activities with even modest contractor help generally fall back to Test 3.

What 'substantially all' means in practice

Tax Court and IRS guidance has not provided a bright-line threshold. Practitioners typically use 80-95% as the working range. Below 80%, Test 2 likely fails. Above 95%, Test 2 likely passes.

Document carefully if relying on Test 2. The audit-defense profile requires showing both the taxpayer's hours and every contributor's hours.

Common Test 2 scenarios

Solo-managed single-family rental where the owner does all repairs and tenant communication: Test 2 passes if no paid contractors.

DIY house flip where the owner does substantially all construction work: Test 2 passes if subcontractors are minimal.

STR with self-cleaning and self-management: Test 2 passes only if the cleaning is self-performed with no paid cleaners.