A kitbash is a model constructed from parts of other models to create something totally new. The term generally refers to models from various sci-fi universes, as a Porsche mated with a World War II battleship looks kinda silly. Not that it isn't possible, it just kinda defeats the point - the idea is to create something new and realistic (that being an extremely relative term) out of bits and pieces of what a model builder has to hand. Think of it as lego with glue. If you're watching your science fiction series of choice and see the wreckage of a battle or a starship junkyard, you're essentially looking at various kitbashes thrown together for visual impact.

It's also a way for model builders to get some of their lesser known creations or study models out there for the fans, things the fans probably wouldn't see otherwise.

Back when amateur modeling was popular and kits were freely available everywhere (bit harder to find nowadays), professional builders would buy them by the truckload to fool around with for ideas. This was particularly convenient for model builders of, say, the Star Trek series as most of the parts were interchangeable and new ships could be built with ease.

Another side to kitbashing is the use of various bits of various models to faithfully replicate things that already exist but that kits haven't been produced for. The kitbashing community particular to the Star Trek universe, for example, is utterly insane. Some of these people are professional modelers and some are hobbyists, but all of them have an eye for detail that would amaze (or more likely scare the pants off of) people who stumble across their 'net forums. I've seen entire forums devoted to the number of lifeboat hatches on the surface of starships and what color they should be. This is a very different community from the starship schematic communities - anyone with a copy of photoshop can copy/paste extra engines onto diagrams of a starfighter; to actually build the thing (particularly to build them from scavenged parts) takes skill.