As Trofaste explained, this sentence means that the temperature is freezing cold (very cold), not that a liquid is freezing (turning into a solid).
Duo has accepted "It rains" for "Il pleut" and "It snows" for "Il neige" so why not "It freezes" here?
Because "it freezes" would imply that something is physically freezing, while that is not what the sentence is trying to say. "It's freezing" in this case doesn't mean that water is freezing, it's implying that something is freezing cold. It's a weird English grammar thing.
il fait froid I would say it is freezing il gele is more that the water freezes... or am I wrong?
As a regular "-er" verb, the passé composé (perfect past tense) of the infinitive "gèler" uses the auxiliary verb "avoir" not "être".
"It is frozen" = "Il a gelé".
Right, but "it is frozen" is using a present tense verb (is) and an adjective (frozen), not the compound past, and translates to a similar construction in French.
No, it wouldn't. You have to construct it with the impersonal "il" and the conjugated form of the verb "geler" (to freeze): "il gèle".
"It's freezing.", "It's freezing out.", and "It's freezing outside." should all be accepted.