A few clarifications needed here.
. If you paid off the loan in 2021 (this year),
Now why would the 2020 tax program be asking about a loan paid off in 2021? It wouldn't.
If you paid off the loan in 2020, the balance on the payoff date would be ZERO. But, on your 1098 for that *old* loan, box 2 shows the balance on Jan 1, 2020 and that's the amount you will enter for box 2 on the screen where you enter the 1098 information.
Do I record the security deposit as income?
No. The security deposit is not your money. It belongs to the tenant and will "always" belong to the tenant until you make a legal claim for it. A security deposit in money held "in escrow", and the holder of that money has no legal claim to it, until such time they actually file for such claim.
In the year you make legal claim for it, which is typically the year the tenant vacates the property, then it becomes reportable and taxable income to you if your legal claim finds in your favor. If you make no legal claim to it, then that's because you returned the security deposit to the tenant upon their vacating the property under the terms of the lease agreement.
