I am being asked by several clients about taking money out of their
rental house equity and using it to buy another rental. I feel like the new
law made it clear that money taken out in a refi had to be used on the
property it was secured by to result in deductible interest- so if they do take the cash out the interest would not be deductible.
Is that correct?
No that is not correct; it would be correct under the rules for qualified residence interest, schedule A, but not for investment property. For investment property, you track the use of the refi funds, and if the refi funds are used to purchase additional rental properties, the interest expense is allocated between the rental properties as deductible interest expense.