The correct answer is (D).
(D) Flaw
Step 1: Identify the Question Type
The question asks for the "reasoning error" in Tom's argument, which is another way of asking for the flaw. Moreover, while Tom's argument may have several flaws, the question specifically asks for the flaw pointed out by Rolanda's response. Be sure to read all parts of the conversation for context.
Step 2: Untangle the Stimulus
Rolanda starts the discussion by recommending that she and Tom rent the Oak Avenue house. Her evidence is that it has the largest yard they've seen in Prairieview. Tom counters by disputing the yard size. Tom argues that it's not the biggest yard they've seen. His evidence is that the section within 20 feet of the street actually belongs to the city. Rolanda fires back by saying the same 20-foot restriction holds for all the other homes in Prairieview.
Step 3: Make a Prediction
Tom's argument assumes that taking 20 feet off the Oak Avenue yard means that the yard is technically smaller than it looks. However, by pointing out that the restriction applies to all of the other yards they've seen in the city, Rolanda suggests that Tom, mistakenly, is applying the 20-yard restriction only to the Oak Avenue yard. If he were to make the same reduction to all of the yards they've seen in Prairieview, then the Oak Avenue yard would be the biggest.
Step 4: Evaluate the Answer Choices
(D) points out the error that Rolanda has spotted. Tom tried to apply a rule (the property line restrictions) only to the Oak Street house rather than to all relevant houses (all others they've seen in Prairieview).
(A) is Outside the Scope of Tom's argument. His argument is about the actual specs of the Oak Avenue yard, not about the benefits of a particular size.
(B) is a Distortion of the dialogue. Tom doesn't say so explicitly, but he likely assumes that the 20-foot area is not available for private use. If he assumed that it was available for him and Rolanda to use, the fact that the city owns the 20-foot strip next to the street likely wouldn't concern him or make him think of the yard as smaller than "it looks."
(C) is a 180. Tom's mistake is actually not applying a general rule to yards that the rule is intended to cover.
(E) distorts the argument, since Tom never breaks down the yard into parts. Furthermore, if you interpret the "part" to be the Oak Avenue yard and the "whole" to be all yards in Prairieview, then this is a complete 180, as Tom fails to apply the same 20-foot rule to all yards.