Bad brake hose or master cylinder?

I couldn't move rear brake pads apart until I turned hose banjo bolt out one turn to drain some fluid. Brake fluid doesn't go back to master cylinder.
I think there are 2 possible problems:
clogged brake hose
clogged hole in master cylinder.
Which one most likely?

More than likely your teeny tiny return port in the master cylinder is clogged.

I think the 80ST is terminally ill. My gosh, you have 25x more problems than I've had in 40yrs of KZs.

Also the inside of the rubber hose could be collapsed, preventing fluid return.

Any time something you describe happens a full teardown is in order. Pull the pistons out of the caliper and clean the insides, replace any pitted pistons and the seals, reassemble. Do the same for the master, being careful to make sure the small return port is open. Also, replace the brake line. Also again, do the front at the same time.

Agree that your bike is a disaster. That's what happens when people don't do maintenance and just wait for crap to bust before doing any work.

Plus 1 , All of the above. Ya want to be on the cheap? Start with the brake hose. Get a fine piece of .035" mig wire from a welder.
A can of brake clean (Bad stuff is better with chlorinated solvents or tri clor).
Have an air compressor.
And a 6 pack of Beer!
AND ALWAYS WEAR SAFETY GLASSES
And if you get that far, you can clean it out.
If you get farther? If you try and blow the pistons out with high air pressure 100 PSI! make sure your fingertips are out of the way!

Reassemble and repeat, but this time loosen the banjo bolt at the M/C. If the pads open, problem is in the M/C. If not, bad hose. It's most likely going to be a clogged return orifice in the M/C. It's tiny and easily blocked. Hoses rarely collapse shut. They bulge or leak. If you've got a blocked hose, a complete flush and rebuild are in order. Actually a complete rebuild is in order either way.

Yes. likely the return port is clogged. But why? Answer: because there is sludge in the system. You can clean the blockage but the sludge is still in the system. You can NOT clean out the chunkies by flushing the fluid. The inside of the system has scale on the parts, including inside the brake line. Put new fluid in the system and watch it start to turn dark and contaminated within a month.