I'm taking the cue from the latest news thread about Kentucky Route Zero and especially from lubwak's post. I'd like to hear from you: how you would define "magical realism"; how you would implement it in video games especially, in terms of gameplay, audio, visuals, storytelling, and the like; and what other games you think might be listed in this particular category.
(BTW I have not played the game)

I haven't played the game you mention either, but this is a very interesting question for me, as I fell in love with magical realism after reading The House of the Spirits by Isabel Allende.

The purpose of magical realism is to tell a story that feels real. It explores life experiences, emotions and personal relationships in the crudest and most transparent way, in order to describe and discover what these are really like, no matter the consequences. At the same time, some fantastical elements are introduced in a subtle way, which impress and amaze the reader but are accepted by the characters as part of their world without hesitation.

For a game to be a part of magical realism, it would have to build realistic characters and storylines, possibly (but not necessarily) set in a contemporary world/timeline. It would have to focus on storytelling; I think the most fitting genre would be a point-and-click adventure or a narrative-driven action-adventure or RPG. The fantasy elements would need to blend organically with the world and its story, but also present an opportunity to stand out. I would implement so the player needs to learn how to use them to solve certain puzzles, not unlike how in many sci-fi adventure games you need to use futuristic technology to advance.

In that particular context, it speaks of a fantastic adventure that is grounded in reality. A rather silly way to say, "Grounded adventure".

Honestly, I was hoping for something more along the lines of discussing realistic magic systems.

Never played that game, but just going by the term... I'd guess it would be a thoroughly realistic setting, presented in such an artistic way it feels magical. You could also maybe define it as making reality feel magical, like an expressionist painting. Maybe he meant something completely different though.

Only thing video game wise popping into my head at the moment is the use of lighting to evoke mood in games like Splinter Cell, FEAR and Resident Evil (before the fantasy parts come in). Actually the Resident Evil remake, with it's superb use of pre-rendered backgrounds and lighting, presents some of the most "magically real" environments I can think of, removing all the 3D "monsters" from the equation.

For those unfamiliar with the term: Magical realism

Germane to the OP: Memoranda is mentioned in the "Video games and new media" section of that article as having "embraced" magical realism.

Not sure if I get the definition of magical realism correctly...
Do you think Disco Elysium could be catalogued as magical realism, too?

Magical realism is magical rationalism.
Instead of leaving magic as an unknowable force in the world the just is; it seeks to rationalize how it can.
There's many variants on that theme and a very common one is that magic is just science.
'It works and there are reasons for it, but you don't have the knowledge personally to make sense of it; but trust us.'
There is also the use of quantifiability.
'Magic doesn't come from nowhere, it is taken from somewhere else; which is why in one reality there is no magic and in our reality there is'.
An example of this are the two worlds of Full Metal Alchemist.
The loosest way i would implement it in a video game is to tie it to a neutrino field effect being a cosmic anti-magic zone, that due to the nature of it being nullifying of magic means we would of not had magical tools to quantify it's effect.
Thus it could suddenly run out of projection and quickly reintroduce magic perhaps quantifiable through a higher rate of mutation and tectonic shifts.
Think shadow run preempted by a period of x-men.
Games in this particular category would include most strongly the final fantasy series, wolfenstien and later doom (won't comment on due to potential censorship for somehow being political); but not for example ziggarut which has mages, but does not try to rationalize why there are powerful mages and just structures how a mage becomes more powerful.
What i mean is that it's not magical realism/rationalism to say people have latent magic and collecting certain amounts of magical crystals makes them more magical.
That's more placing logic on top of magic rather than confining magic to having been reasonably around and have actionable mechanics.
I would try to give examples of how you would plausibly add such things to the real world as a state within a fictional work, but i don't want to get censored again by GOG and including anything about the real world is clearly the easiest way of accomplishing that.
Though i will say Deadlands may give you a heads up; it's a roleplaying game which is an example of magical logic, but NOT rationalism.
Basically the magic comes about as a reaction, it has rules in how it is prevalent, but it doesn't try to heavily pin them down to a real world underpinning.