Not all interest is deductible. Personal interest, interest paid on money borrowed to buy personal items such as clothing, gifts, artwork, furniture, and cars not used for business, is not deductible at all.
Investment interest, interest paid on money borrowed to make investments, is deductible only to the extent of investment income (income or gain from property held for investment). Therefore, if during the year, you paid $6,000 in investment interest but earned only $3,000 in investment income, only $3,000 of the interest is deductible (the remaining $3,000 in interest may be carried forward to future years and deducted against investment income earned in those future years). Investment interest is also a "miscellaneous itemized deduction," and, therefore, even if deductible, it can be claimed only to the extent that (together with any other miscellaneous itemized deductions) it exceeds 2 percent of your adjusted gross income.
Business interest, interest paid on money borrowed to use in a trade or business, is always deductible in full.