A considerable part of our lives is spent engaging in the entertaining worlds of fiction that are accessible through media such as books and television. Little is known, however, about how we are able to readily understand that fictional events are distinct from those occurring within our real world. The present functional imaging study explored the brain correlates underlying such abilities by having participants make judgments about the possibility of different scenarios involving either real or fictional characters being true, given the reality of our world. The processing of real and fictional scenarios activated a common set of regions including medial-temporal lobe structures. When the scenarios involved real people, brain regions associated with episodic memory retrieval and self-referential thinking, the anterior prefrontal cortex and the precuneus/posterior cingulate, were more active. In contrast, areas along the left lateral inferior frontal gyrus, associated with semantic memory retrieval, were implicated for scenarios with fictional characters. This implies that there is a fine distinction in the manner in which conceptual information concerning real persons in contrast to fictional characters is represented. In general terms, the findings suggest that fiction relative to reality tends to be represented in more factual terms, whereas our representations of reality relative to fiction are colored by personal subjectivity. What modulates our understanding of the relative difference between reality and fiction seems to be whether such character-type information is coded in self-relevant terms or not.