Where do you draw the line between spoof and copyright violation? How?

I believe that a very important factor and a common place where people go wrong with that is that the spoof needs to be making fun of the original work in some way. If you are not making fun of the original work but instead making fun of something or someone else, then it is not really a spoof and you lose the "fair use" defense.

You have raised a particularly fuzzy area of the law. Generally speaking, parody (or spoof as you term it) can be defended under fair use doctrine of the Copyright Act itself. Section 107 of the Copyright Act lists 4 "fair use factors" that must be analyzed to determine whether a particular use of a copyrighted work, such as a parody, is fair use. These factors are the: (1) purpose and character of the use, including whether the use is commercially motivated or instead is for nonprofit educational purposes; (2) nature of the copyrighted work; (3) amount and substantiality of the portion used in the newly created work in relation to the copyrighted work; and (4) effect of the use upon the potential market for or value of the copyrighted work. All 4 of these factors will be considered by a court when evaluating a fair-use defense. No single factor by itself is sufficient to prove or disprove fair use. As you can see, there is no bright line that identifies whether your parody will survive a copyright infringement suit or not. Accordingly, you should seek intellectual property counsel with an understanding of copyright law to discuss your particular parody and have them perform the fair use analysis with the relevant case law to determine whether it is a parody or an infringing copyright violation.

That's a million dollar question! You have to go far enough that everyone can identify the original work and understand that you are parodying it but not so far that you are liable for plagiarism. So you'll need to do more than just change the names and location you'll need to write the work in your own words and base the story on a similar, but not exactly the same, outline.

Parody is the legal term for the spoof that you want to make and sell. It will likely lead to a law suit against you - but you might win. Years ago - Two Live Crew did a parody of the song Pretty Woman - and they won the court case filed against them - but it cost $$$ to do so. The parody case law is interesting - but it shows the cost of wanting to do what you want to do.