Where does fiction come from?

Everyone knows that truth is stranger than fiction. And if fiction writers take their ideas from real life, how do they get away with it? How do they avoid being sued or, at the very least, having most of their friends and relatives stop talking to them?
Here's how: Take an incident in your life, or the life of someone you know or knew in the past. Now take the gist of that incident, whatever it is that really makes you think, and use that as the germ of your story. Now make up the rest. Or move things around. If the incident happened in Florida, set it in North Carolina. Have your character be a doctor when your real life person was in real estate.
As an example: A former acquaintance of mind was murdered by her husband. I always thought the woman had beautiful hair and she was impeccably groomed. I used that kernel of information as the center of the story and took it a different direction. I made the person who found the body the main character and focus of the story.