One site of damage is in the temporal lobe. This damage probably disrups circuits involving the amygdala, an almond-shaped strucutre that seems to serve as an "emotional evaluator", helping an organism to detect stimuli associated with threat or danger. The amygdala is also important for detecting positive stimuli. Patients with capgras syndrome also have brain abnormalities in the frontal lobe, specifically in the right prefrontal cortex.
Neuroimaging reveals diminished activity in the patients frontal lobes whenever they are experiencing hallucinations. One plausible interpretation is that the diminished activity reflects a decreased ability to distinguish internal events from external ones, or to distinguish imagined events from real ones.