I occasionally get questions about support for advanced MSBuild features, and my answers are usually fairly short. This post aims to be a more comprehensive description of the current state state of MSBuild support in MonoDevelop, so I can refer people to it. If you've never hand-edited custom targets for an MSBuild file, this doesn't affect you at all, but feel free to read it if you're curious.
MSBuild is the Microsoft build engine that was introduced with .NET 2.0 and Visual Studio 2005. It's the format for the project files of Visual Studio 2005 and later, and has been MonoDevelop's default/native file format since MonoDevelop 2.0. It's XML-based, so it can be handled easily and reliably by tools such as IDEs. It's essentially intended to be consumed primarily by IDEs — but it also has the power of an advanced, extensible build system that lets you do pretty much anything if you're willing to get your hands dirty. Calling it "Makefiles in XML" wouldn't be too far off the mark.
The MSBuild engine and hosting API are part of the .NET framework. Mono has its own implementation called xbuild, which runs on Mac, Linux and Windows. The core features of xbuild are solid, but it's missing some of the advanced features added to MSBuild in .NET 3.5 and 4.0, and some of the common targets such as the ASP.NET web project targets.
MSBuild is extremely complex and exposing all its features in the MonoDevelop GUI would be practically impossible. However, the projects created by the IDE by default use the "common targets" to build the project, which understand a certain number of properties (e.g. "OutputPath") and item types (e.g. "Compile", "EmbeddedResource"), and implement certain targets (e.g. "Build", "Clean") that operate on these items and are controlled by these properties. They also make very limited use of conditions, by conventionally having several groups of properties conditional upon the value of the "Configuration" and "Platform" variables. To edit projects that haven't been hand-modified, the IDE only really has to understand the item types, properties, and targets used by the common targets.
MonoDevelop has an internal project model that represents the projects and their properties and items. When loading the project, MD deserializes the MSBuild file into its internal model, and ignores the items, properties and imports it does not understand. When saving MSBuild projects, MD serializes its internal model into the MSBuild format and substitutes them for the parts of the MSBuild file it understood, thereby preserving the parts of the file that it did not understand: custom items, properties, targets, conditions, and imports.
There are a couple of things the serialization doesn't handle — when hand-edited projects use properties or items as values of any of the standard properties or items. MonoDevelop does not evaluate these — doing so would require a full MSBuild engine — and even if it did, it would not easily be able to present them cleanly in the UI and serialize back any changes to the values. It might be possible to special-case some things, but it's not something that can be fully solved in a generic way. Probably the best we could get would be to have MonoDevelop detect property/item values it cannot handle, evaluate them via the MSBuild engine when loading, make them non-editable with a warning flag in the Project Options GUI, and skip them when serializing.
Wildcards in items paths are a similar problem. For example, evaluating a wildcard in an item when deserializng would result in adding several items to MD's internal model. And in simple cases, we could match all those items back to the wildcard MSBuild item when serializing. So far so good. But what happens if a new file is added on disk outside of MD while the project is open? What happens if the user manually removed a single item in the solution tree? What happens if the user changes the metadata of a single item? In all of these cases, the items can no longer be mapped back to the single wildcard MSBuild item. It would probably be possible to remove the wildcard item and serialize all the items to MSBuild individually — but that might not be what the user expected. This is just one example of how supporting a simple MSBuild feature in the IDE might not be as simple as it looks.
For building the projects, MonoDevelop's story is much better, because it has the ability to build the projects using the actual MSBuild/xbuild engine, thereby supporting all features that MSBuild/xbuild does. There are currently two build codepaths in MonoDevelop: the old internal build engine, and the MSBuild engine. The internal build engine is very old, and predates the existence of MSBuild. It operates directly on MonoDevelop's internal project model, and is extensible via the addin system. The MSBuild engine loads the actual project files into a builder process and builds them using the MSBuild hosting API.
By default MonoDevelop uses the old engine, but the addins for individual project types can opt into using the MSBuild engine for just those projects — Mono for Android does this. Enabling the experimental option "Compile projects using MSBuild/XBuild" in MonoDevelop's preferences (and restarting MonoDevelop) causes the MSBuild engine to be used for all projects. This is marked experimental because it does not work for all project types — for example, there are no MSBuild targets for MonoTouch, MonoMac or ASP.NET projects yet. User projects that depend on MonoDevelop's old custom build command system will not build correctly with the MSBuild engine. And some of the old MonoDevelop custom project types such as translation projects and C/C++ projects would need to be migrated to a new file format before they could even have MSBuild targets.
In general, expansion of the MSBuild support in MonoDevelop is not a high priority for the MonoDevelop team, since these advanced build features are of interest to a very small subset of users, and there are other things that could be done to improve the IDE experience for a much greater number of users. However, it's an area of ongoing improvement and will likely become more important in the future.