In the book I'm reading, the following argument is presented
There are liars. Therefore, there are thieves.
The premise is symbolised as ∃x(Lx) while the conclusion is symbolised as ∃x(Tx). The following interpretation is given to show that the argument is invalid:
Let the domain be {1,3} and the predicates L(x) and T(x) be interpreted as :
L(x) ↔ x = 1
T(x) ↔ x = 2
So that the premise ∃x(Lx) is true when x = 1 whereas the conclusion ∃x(Tx) is false with respect to the domain.
My confusion comes from '2' being in the predicate T(x). 2 isn't in the domain and I'd like to know if interpretations such as this is really allowed in first order logic. Sure the interpretation 'x=2' has the same number of free variables as T(x), but since 2 isn't in the domain, shouldn't 'x=2' technically have no meaning in this domain and therefore no truth value?
You are right. Normally, in a structure with domain $\mathcal{A}$ and $\mathcal{I}$, for an $n$-ary predicate $P$, $\mathcal{I}(P^n) \subseteq \mathcal{A}^n$, i.e. interpretation of an 1-ary predicate is a subset of the domain, the interprtation of an $2$-ary predicate is a subset of $\mathcal{A} \times \mathcal{A}$, ...,
Your book might presuppose some weird definition of models in which non-logical symbols can be interpreted as anything, but normally you'd want models to be closed systems, in the sense that interpretating some predicate shouldn't shoot you out of the domain of the model.
In order to prove that $\exists x L(x) \not \vDash \exists x T(x)$, they should rather have presented a model in which there are liears but no thieves at all, e.g.
$$\text{domain} = \{1\};\ \mathcal{I}(L) = \{1\};\ \mathcal{I}(T) = \emptyset$$
Or, with the $\leftrightarrow$ notation, $$L(x) \leftrightarrow x = 1;\ T(x) \leftrightarrow \bot$$ - but this notation presupposes that 1 (and 2 etc.) are constants, which, as Mauro Allegranza points out in their comment, need to be assigned an interpretation as well in order to be any meaningful.
May I ask which book you are using, and how they define models? If they nowhere give a precise definition of what an interpretation of a predicate is, then it's probably not a good book anyway.