What is the real difference between a patio and a terrace?

Patio: A paved area near a house that is used for dining or recreation. Also: an open inner courtyard found in many Spanish-style houses.

http://www.answers.com/topic/patio

Terrace: A level area that is outside a house, apartment or other building; balcony. Also: A raised, leveled-off section of ground, usually in a series.

http://www.answers.com/topic/terrace

Technically, a terrace must be level, not necessarily paved. But the two terms are often used interchangeably in describing an outside paved living area adjacent to a house. Both words also ave separate uses.

I'll add to the above:

TERRACE

1 a : a colonnaded porch or promenade b : a flat roof or open platform c : a relatively level paved or planted area adjoining a building
2 a : a raised embankment with the top leveled b : one of usually a series of horizontal ridges made in a hillside to increase cultivatable land, conserve moisture, or minimize erosion
3 : a level ordinarily narrow plain usually with steep front bordering a river, lake, or sea; also : a similar undersea feature
4 a : a row of houses or apartments on raised ground or a sloping site b : a group of row houses c : a strip of park in the middle of a street often planted with trees or shrubs d : street
5 : a section of a British soccer stadium set aside for standing spectators

http://www.merriam-webster.com/dictionary/terrace

PATIO

1 : courtyard; especially : an inner court open to the sky
2 : a recreation area that adjoins a dwelling, is often paved, and is adapted especially to outdoor dining

http://www.merriam-webster.com/dictionary/patio