Ocean City’s narrow defeat of rental restrictions reveals deeper questions about what constitutes a “business” — questions that Cape Charles continues to grapple with as both communities face the double-edged sword of vacation rental prosperity.
The dust has barely settled from the closely contested special election in Ocean City, Maryland, where voters rejected proposed short-term rental restrictions by the razor-thin margin of 34 votes. But beyond the 834-to-800 defeat of the ordinance lies a fundamental question that’s reshaping coastal communities: when does a rental property cross the line from residential use to commercial enterprise?
This classification debate isn’t merely academic — it strikes at the heart of zoning laws, property rights, and community character from Ocean City to Cape Charles, Virginia, where similar battles are unfolding with profound implications for residents, property owners, and local economies.
While local governments wrestle with definitions and zoning classifications, the federal government has already drawn clear lines in the sand. According to Internal Revenue Service guidelines, any property rented for more than 14 days annually must be classified as either a “business” or “investment” property for tax purposes.
The distinction matters enormously for property owners. Those who actively manage their rentals — handling bookings, maintenance, and guest relations — may qualify for business tax deductions that can significantly reduce their tax burden. Property owners who hire management companies to handle operations typically see their rentals classified as passive investments, subject to different tax rules with varying benefits and restrictions.
“In essence, the local argument over the classification of a short-term rental property is already settled at the federal level,” notes the ongoing Ocean City debate, where the city’s comprehensive plan prohibits “businesses” in single-family residential zones. “Either way, the IRS says an STR is a business entity or an investment property because of the 14-day rule.”
This federal classification creates an inherent tension with local zoning ordinances that often don’t explicitly address short-term rentals, leaving communities to grapple with fitting a square peg into round regulatory holes.
Ocean City’s referendum battle illuminated the deep philosophical and economic divisions within coastal communities. The defeated ordinance would have required minimum five-night stays in single-family residential and mobile home districts, increasing to 31-night minimums by 2027. The restrictions would have affected roughly 300 to 350 units out of Ocean City’s estimated 10,000 rental properties.
Yet the razor-thin margin — 800 in favor and 834 against — demonstrates that Ocean City remains deeply split. Supporters of the restrictions cited noise, trash, and overcrowding issues, arguing that preserving neighborhood character outweighed property rights concerns.
The debate revealed competing visions of community identity. Supporter Gordon Kretser argued for “people who will stick around and provide value to the community,” while opponent Rob Knauer warned of “sending away thousands of people who visit this town and have done so for decades.”
100 miles south in Cape Charles, Virginia, similar tensions have been brewing with perhaps even higher stakes for community character. The Cape Charles Town Council recently approved new short-term rental regulations, intended to provide the requirements to allow certain limited commercial uses in town zoning districts containing uses per Article III. The regulations for STRs are designed to accommodate an STR owner’s and operator’s limited commercial use in a way that is safe for the guest, and meets town requirements.
The Cape Charles situation illustrates how rapidly vacation rentals can transform small communities. During town hall listening sessions, residents complained that “the town has lost almost entirely its racial and economic diversity” due to short-term rental proliferation. One speaker warned that “We are at a saturation point” and called for caps on rental numbers.
Local critics argue that “STRs have dried up the inventory of long-term rentals and have caused taxes to skyrocket,” creating a cycle where long-time residents are priced out of their own community. One citizen told the Cape Charles Mirror about friends leaving the historic district, saying, “They are fed up with Town Council showing no inclination to cap STRs and help local families”.
The economic pressures are real and measurable. One resident noted their home’s appraisal has tripled in just nine years, with taxes following suit, explaining “unlike STR owners, we have to tighten our belts to pay these taxes, because these are our homes and not the cost of doing business, which you just pass on to your customers.”
Both communities face the same fundamental paradox: local zoning ordinances that prohibit commercial activities in residential zones, while the federal government clearly classifies short-term rentals as business or investment operations.
This creates a regulatory gray area where property owners operate under federal business classifications while local governments struggle to maintain residential character through zoning restrictions that may not account for modern sharing economy realities.
Economic Stakes and Community Identity
The economic implications extend far beyond individual property owners. In Cape Charles, short-term rental hosts must obtain business licenses and register with the Town.
The rental industry has spawned entire supporting economies. Professional management companies, cleaning services, and maintenance providers have built businesses around the short-term rental sector, creating employment and economic activity that supporters argue benefits entire communities.
Yet critics in both towns worry about the loss of year-round community fabric. The seasonal nature of short-term rentals means neighborhoods can feel abandoned during off-peak periods, while peak times bring waves of unfamiliar faces that longtime residents say erode community bonds.
As both communities move forward, they face the challenge of reconciling federal tax realities with local zoning desires. Ocean City’s narrow referendum defeat doesn’t end the conversation — town leaders could still pursue new legislation, and many supporters hope “the Ocean City Council will take future action to address their concerns”.
Cape Charles appears to be taking a middle path with its approach, creating additional oversight while stopping short of outright bans. The town’s recent ordinance adds “an additional layer of oversight and regulation for property owners seeking to operate STRs”.
The fundamental question remains: how do small coastal communities balance property rights, economic opportunity, and community character when the federal government has already classified these operations as businesses, but local zoning wasn’t designed for the modern sharing economy?
Both Ocean City and Cape Charles are discovering that this question has no easy answers. The narrow margins in Ocean City’s vote and the ongoing debates in Cape Charles suggest that finding the right balance will require continued community engagement, creative regulatory approaches, and perhaps most importantly, acknowledgment that traditional zoning categories may need updating for 21st-century realities.
The business classification question that sparked Ocean City’s referendum battle isn’t going away. As more coastal communities grapple with short-term rental impacts, they’ll need to develop new frameworks that recognize both the federal reality of STR business operations and local desires to preserve community character.
For now, the votes have been counted in Ocean City, and Cape Charles has enacted its STR approach. But the underlying tensions between property rights, business operations, and residential zoning remain unresolved — ensuring that the short-term rental debate will continue shaping these coastal communities for years to come.
About the Author
The town of Cape Charles has not enacted a conditional use permit requirement. It has passed a” Buy Right ” zoning ordinance.
Things and times change, bottom line. Ocean City historically was founded on “weekly “ rentals for over 5 decades, then the vacationer went to 4 nights, even 3 seemingly overnight. Was that a result of inflation (greed) that made cruises/other destinations more attractive? A change in family values where the families no longer choose that one full week together? The pandemic which opened up the explosion of campgrounds and other venues? The only thing for sure, most things that change don’t go back. The best answer to both towns, is to do the best they can to regulate the negativity associated with STRs, (oops, there’s government oversight again) and for everyone to have faith “it will always work out “. Btw, doing both the research and visits, the entire vacation market of both towns (as well as the taverns and restaurants) is off substantially from the highs of the last few years. Remember this, you’re about to see another substantial change, the writing is on the wall.