So, could you have used "este" instead of "e"?
Yes. They should be fully interchangeable.
I translated this as "He's not handsome!" and was marked wrong. Does Romanian, like English, distinguish between beautiful and handsome? Or why else was my translation wrong?
Probably because you used he and it was looking for it because it probably would have specified usin el este if it was he
Could it mean "It's not nice"?
Bih i just had one typo