I kept going with the tooth fairy thing as long as my kids had teeth falling out...its all fun and games, and my daughters knew, pretty early on that there was no such thing, but they played along. I told them as long as they believed, then there was one, when they stopped believing, she would not come anymore. They wanted the $ so they played along! ;)
With the Grandkids we do Santa but we don't do the tooth fairy or Easter bunny. I can't really tell you why. Perhaps it is because my boys just never..not even at 4&5 bought the whole tooth fairy or Easter bunny thing. When they really begin to question I think it's important to emphasize real and make believe. My sister told her kids (once they began asking) that if they didn't believe in Sants they would get nothing. They didn't believe , they did get stuff..and in the end they didn't understand why Mom lied. You can tell them the stories and 'make believe' with them until they ask you straight up. If you continue then...I think it is a slippery slope.
I almost had to tell him last night when he caught me taking the dixie cup with the tooth out and leaving the dollar behind. LOL! However, he was half-asleep and the room was dark. He accepted "I was just making sure you left your tooth out." I was prepared to answer his "was it you?" questions this morning. But nope. No such thing. My son is 7 by the way.
Personally, when it comes to the make-believe of childhood I think child led is best. "What do you think" is a fine response to "Is so-and-so real?" I'll let my two believe for as along as they want to believe. And when they tell me they're ready to move on, so be it. When my son was quizzing me about the tooth fairy at 5 1/2 when he lost his first I let him answer all his own questions. "What does she do with them" What do you think? "I think she makes art work with them." write her a letter and ask. So he did...and google helped me find pics of teeth sculptures. ;)