It's known that Magic and Loss was inspired to the loss of two of Lou's close friends: Doc Pomus and someone only identified as 'Rita'. He's been very open about Doc, but when asked about Rita he simply said “Rita wouldn’t have wanted to be known. I was a very lucky person to know her."
There was a widely held theory that Rita was the Factory character Rotten Rita (Kenneth Rapp) - however he didn't actually die till 2010.
As for Rachel, for years nothing was known of what happened to her after breaking up with Lou in 1978. However the New York Times reported, as part of an article about mass burials of AIDS victims on Hart Island that "Another notable person buried on Hart Island is Rachel Humphreys, who in the mid-1970s was Lou Reed’s transgender partner and the inspiration for the music and artwork on Mr. Reed’s 1976 album “Coney Island Baby.” Ms. Humphreys, whose birth name was Richard, died in 1990 at St Clare’s Hospital, which specialized in treating AIDS patients at the time, though Ms. Humphreys’ official cause of death is unknown."
It's reported elsewhere that the date of death was January 30th 1990, age 37 - which would fit with both the timeframe of the album and Rachel's approximate age.
The clincher, though, is right under our noses - the CD booklet for the album:

The face on the left is of course Doc Pomus. But the fainter woman's face on the right - surely that's Rachel? Looking at other photos of her online, it's a pretty good match I think.
Anyone got any thoughts?