Magical Realism is like fantasy except the fantastical elements are embedded in the story in a way that it seems normal to the character.
For example: One summer day, a girl was walking to the grocery store to pick up some bread. She was in a hurry, but there was a large crowd in front of her. She didn’t want to be late so she spread out her wings and flew over the crowd and into the store.
See how this story makes the wings seem like an ordinary thing in this world? This is one exampl of magical realism. Some magical realism is very borderline fantasy (usually based off of the author’s attitude). Usually magical realism has an element of social commentary.
One author who writes magical realism is Gabriel García Márquez, who wrote One Hundred Years of Solitude and many other books.