Truth stranger than fiction

Isn't it amazing when you least expect it, up pops an idea for a novel or story. Right out of the blue! Well this discussion is about truth and fiction.
This week I heard a romance story that would make my hair curl-and that usually takes a lot. It had tension, yearning desire, forbidden love and spanned generations. It did end with a satisfactory resolution to cap it all off. What more could anyone ask for? It just happens to be a true story, and I am not into writing memoirs, yet anyway.
So can I use some elements of this true love story in my next novel? Well, I guess, as readers you will never know the truth behind the answer to that question because where does truth stop and fiction begin?
I know as one observant people-watcher, I often use an eclectic mix of people I know, those in my head and even those I see but don't know for my characters in my stories . Even settings have been jumbled or contrived from reality to accommodate the story to greatest benefit.
I'd be interested to know how others handle the mix between truth and fiction in their story-telling.
For my latest manuscript I envisioned a beautiful waterfall as part of my setting. I even knew which one I would use from my actual teenage memories. Trouble was, when I went as part of a family outing to photograph it for inspiration, it wasn't there. I don't know where I stored that memory from but the recall didn't produce accurate details. I know what I imagined I saw but couldn't find the reality.
Never mind, my imagination is more fun anyway. How's yours?
Regards
Annie