As a Ukrainian native speaker, I find it funny that this difference has to be pointed out in English every time in the comments. :)
Hmm. I believe (I'm not a native speaker) that Er could be used as "it" when it is referring to a known masculine noun. Ich habe einen Speigel. Er ist kaputt. Although, when I ran my theory through google translate, it still spit out "Es ist kaputt." But I'm pretty sure you can use Er, Es, or Sie if it matches the object's gender.
I submitted "Der ist frei.", since that's what I thought I heard and it was considered. I came here to find that the correct answer is actually "Er ist frei.". I just want to know if both answers are correct or if it's just an error in Duolingo. I hope someone can enlighten me on this. :)