Because "tio" is "that".

You could also use "tiu" if you were thinking of "That" as short for "that roof" - "tiu (tegmento) estas ligna tegmento".

Because the structure of that sentence is different and would translate as "that is a rooftop made out of wood". Although the meaning remains the same, the sentence doesn't.

In that case I believe it's because the guys over duolingo have to add manually the correct answers. That means they would have to input all the correct combinations for every exercise... Which they do little by little as you use the report button and they realize they were missing that specific correct answer.