Cash Out Paid For Rental to Get Downpayment for Another Rental

[Diane Tycangco]

Hello, I am thinking of getting equity out of a paid-for rental and use it as a downpayment for another rental.  Someone told me that when you do not use the loan to buy, improve the property you borrowed money from, you cannot deduct the interest you paid.  Is this true?  What is the solution to this problem?

Of course, the mortgage interest on the 2nd rental is fully deductible as expense, right?

Thank you!