Undoped and Mg-doped (y = [Mg²⁺]/[Fe³⁺] = 1, 2, 3, and 4 at.%) Fe₂O₃ thin films were synthesized by a simple spray pyrolysis technique. The thin films were extensively characterized. X-ray diffraction (XRD) and energy-dispersive spectroscopy (EDS) analysis confirmed the successful insertion of Mg in the rhombohedral structure of Fe₂O₃. In addition, scanning electronic microscope (SEM) and confocal microscope (CM) images showed a homogenous texture of the film, which was free of defects. The rough surface of the film obtained by spray pyrolysis is an important feature for photocatalysis and gas sensor applications. The direct band gap of the doped Fe₂O₃ films obtained for [Mg²⁺]/[Fe³⁺] = 3 at.% was E_dir = 2.20 eV, which recommends the Mg-doped iron oxide as an optical window or buffer layer in solar cell devices. The photodegradation performance of Mg-doped Fe₂O₃ was assessed by studying the removal of methylene blue (MB) under sunlight irradiation, with an effective removal efficiency of 90% within 180 min. The excellent photodegradation activity was attributed to the strong absorption of Mg-doped Fe₂O₃ in the UV and most of the visible light, and to the effective separation of photogenerated charge carriers.