Also: The 'in' included in the Duolingo English answer is not applicable if the same Dutch statement was made outside in the open - unless of course a sock was held under (or over) a nose and the sock is the point of reference. 'It smells like old socks there - or here' - should be the acceptable response.
The word order of your sentence is perfectly fine. (I wrote the same answer and I am a native English speaker who did very well in English classes!) The location of the "there" may change the tone of the sentence - it's a style issue - but it is not 'bad grammar. Your sentence should have been marked correct.
Again, why is "het ruikt daar naar oude sokken" not a better constructed sentence than "het ruikt er naar oude sokken" since the English translation is: lt smells like old socks IN THERE (a specific place)? I am really having difficulty understanding "er". I thought I understood until condronted by this sentence as well as: "ze spelen er mooie muziek", which I questioned previously. I am hoping that someone can enlighten me. Thank you.
May be I am missing something, but is ..er... not an abbreviation of ...daar? Is...het ruikt daar naar oude sokken...also not ...it smells like old socks there? Conversely, is...daar ruikt het naar oude sokken..., also not......it smells like old socks there...or should it be....there it smells like old socks?
check out the overview page for the lesson (not very accessible if you're using the app): https://www.duolingo.com/skill/dn/Er/tips-and-notes