Watch people in real life and on the news. Find real-life characters you can develop into original characters featuring combinations of traits from several real life people. The real-life characters you draw from might be family, friends, famous people or people you see on the street.
Find the story behind the characters. Story and character work hand in hand in fictional tales. Your story may be based upon a true-life crime or the story of a disabled athlete who competes in a marathon sporting event and overcomes all odds to win. The story doesn't need to be based on any one real-life person or story. It may be a combination of stories you've heard about through the years. Sometimes this is the best approach legally. A combination of events and character traits can help keep your story from too closely mirroring a single person or event.
Write with creative license. Even the most intimate information regarding people and events from real life won't tell you everything you need to know about the story you're telling. You will have to write plenty of fiction to turn a real-life character's story into something interesting for people to read. This may involve cutting elements from the real story to make your fiction flow better, adding dialogue and events that could conceivably have happened given the known facts about true-life events and people you're writing about or adding dialogue and action between characters in your story to help with exposition. You may even need to create fictional backgrounds for some of the characters in your story.
Remember the phrase "just because it happened doesn't mean people want to read about it." This is important when constructing a fictional account of a true life event. Not everything about everybody's life is worth writing down. Sometimes events are worth writing down, but not in the way they actually happened. Be picky about what to include in your fictional account of real-life events. Narrow the focus to tell a core story.
Change the names of people and places to help avoid legal ramifications. You can also set the story in a different time period than it actually happened, keeping the story itself intact but removing it from the real event. Always precede your story with a disclaimer that indicates the story is a work of fiction and any similarities to persons living or dead is purely coincidental.