Is this legal?
Why not? But you might have trouble deducting losses on your taxes, especially if you sell to someone related to you in some way (which is indeed what you're doing). See the added portion below regarding dealing with "related person" (which a sibling is).
The state of Maryland has a transfer/recordation tax of 1.5% for each, the buyer and seller. Would this be computed on the appraised or sale value?
You should check with the State. In California property taxes are assessed based on sale value, but if the sale value is bogus the assessors have the right to recalculate. Since you're selling to family, the assessors will likely to intervene and set a more close to "fair market" value on the transaction, but again - check the local law.
Will this pose any problem if the buyer needs financing?
Likely, banks will be suspicious.Since you're giving a discount to your sibling, it will likely not cause a problem for financing. If it was an unrelated person getting such a discount, it would likely to have raised some questions.
Would I be able to deduct a capital loss on my tax return?
As I said - it may be a problem. If the transaction is between related people - likely not. Otherwise - not sure. Check with a professional tax adviser (EA or CPA licensed in Maryland).
You mentioned in the comment that the buyer is a sibling. IRS Publication 544 has a list of what is considered "related person", and that includes siblings. So the short answer is NO, you will not be able to deduct the loss. The tax treatment is not trivial in this case, and I suggest to have a professional tax adviser guide you on how to proceed.
Here's the definition of "related person" from the IRS pub. 544:
Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents,
etc.), and lineal descendants (children, grandchildren, etc.).
An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the
corporation.
Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code.
A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the
outstanding stock of the corporation.
A grantor and fiduciary, and the fiduciary and beneficiary, of any trust.
Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor
of both trusts.
A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of
that person's family.
A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than
50% of the capital interest or profits interest in the partnership.
Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.
Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each
corporation.
An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest.
Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both
partnerships.
A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the
partnership.
