As the community is located on the local barrier islands, it is subject to tides, which can fluctuate up to multiple feet per day.

[17] In 1926, George McClellan of Long Island, New York, bought four adjoining tracts of land in what is now South Bethany covering a combined 140 acres (57 hectares).

For the next 10 years, the South Bethany Corporation worked to drain and raise marshland to allow additional buildable lots and dug five miles (8.0 km) of canals in the community to ensure that people who purchased a lot in South Bethany would have either direct access to the beach along the Atlantic Ocean – where the community provided no lifeguard service, its only safety measure being a torpedo-style life preserver hanging from a post on the beach – or would reside along a canal offering access to inland bays and rivers by boat.

[19][20] Access to the community was via Delaware Route 14, known as Coastal Highway, a paved two-lane road with no shoulders.

[24] The 1962 storm gave a new impetus to incorporation, because as an unincorporated community South Bethany could not receive federal funding to recover from the disaster.

[23] The assembly eventually did pass an incorporation bill, which the governor of Delaware, Charles L. Terry, Jr., signed in December 1965.

[5] In the first public referendum in South Bethany on incorporation, held in June 1966, voters decisively rejected it.

[23][5] But in 1969 another referendum on the matter won, and on June 18, 1969, Governor Russell W. Peterson signed a bill providing for incorporation of the community as the Town of South Bethany.

[5] At the time, South Bethany had 240 houses and 496 property owners, although its year-round population consisted of just 15 families.

The 1,200-townhome Sea Colony West low-rise beach and tennis resort development later was added just inland.

[26] Opponents of Sea Colony marched in protest and engaged in protracted legal efforts to block construction of the resort, but the property lay outside the town limits of both South Bethany and Bethany Beach, and their efforts to block the construction of Sea Colony failed.

[29] In the same year, South Bethany began installing a central sewer system,[23] and Sussex County prohibited construction in the town within 1,000 feet (300 meters) of the ocean in the hope of restoring the main dune.

[30] In January 1981, the Delaware Supreme Court lifted Sussex County's ban on construction on the dune, and development of the beach area resumed.

[31] During the mid-1980s, a beach replenishment project took place along the town's Atlantic coast to recover sand lost during major storms.

[35] The State of Delaware issued a mandatory evacuation order for beachfront residents and visitors in the town when Hurricane Sandy threatened the area on October 28 and 29, 2012.

[36] In 2014, South Bethany's Community Enhancement Committee created the Art Board initiative, which invited artists from the area to submit artwork with a coastal theme for display on outdoor trash receptacles along Ocean Drive and Seaside Drive.

[37] By 2015, the town consisted of approximately 1,387 properties with fewer than 175 vacant lots remaining, and its year-round population was 600.

[5] A nor'easter hit the Delaware coast from October 2 to 4, 2015, and severely eroded South Bethany's beach and dune.

[38] The beach and dune suffered additional damage during a winter storm that struck the area from January 22 to 24, 2016.

[40] In 2020, the United States Army Corps of Engineers awarded a contract to a local developer to maintain the beach and dunes damaged in the storms.