The History of Danish Dreams by Peter Høeg. An epic novel spanning the 20th century in Denmark by focusing on some characters from various time-appropriate classes (the self-made upper class that replaces the old nobility, the urban middle class etc.) whose marriages eventually result in a single family in modern times... it sounds like a naturalist family chronicle, but fantastic elements crop up right from the start (with a nobleman's manor where time has literally stopped with the exclusion of modernity), and are pretty much accepted by the cast.
Excellent stuff.
Magic Realism and Urban Fantasy are very different things.
You can't even write racist abuse in excrement on somebody's car without the politically correct brigade jumping down your throat!The Posthumous Memoirs of Bras Cubas. Although it doesn't follow the traditional view of Magical Realism, it could be considered one of the precursors to the genre itself and Modernism (at least in Brazil).
One Hundred Years Of Solitude?
/feels predictable
"Why don't you write books people can read?"-Nora Joyce, to her husband JamesJorge Luis Borges is legit. I always assumed he was a crappy boring writer because my parents are fans of his and everything they like is crappy and boring. But then I ran into Tlön, Uqbar, Orbis Tertius and my jaw dropped in awe of that guy's imagination.
edited 8th Jun '14 1:29:11 PM by ThriceCharming
The recommendations of Hoffman and Marquez earlier are heartily seconded.
In a slightly different vein, I would recommend the later stories of Angela Carter and Franz Kafka's fragments and vignettes. The former are mostly deconstructive fables in historical and quasi-modern rather than fantastical settings, in a kind of evolution from her earlier work like The Bloody Chamber (which is amazing but not really magical realism); Kafka's short fiction, on the other hand, presents very surreal and unsettling situations in very drab then-modern settings in a kind of wry, mournful tone that tends to be far funnier than it theoretically ought to be.
I'll hide your name inside a word and paint your eyes with false perception.(I might also recommend Bruno Schultz ["Cinnamon Shops", etc.], and perhaps Thomas Ligotti's more metaphysical work ["The Town Manager", "The Greater Festival of Masks", etc.], but whether I could would depend on your reactions to Carter and Kafka as much as Borges.)
I'll hide your name inside a word and paint your eyes with false perception.

I've just finished my collection of Jorge Luis Borges and am very much in the mood for some magic realism. Plus I thought it was about time I dove into the forums after so much lurking and this seemed a fun way to do it, as I respect your informed opinions.