We have concluded that to handle local Toaster use we need a 'local' release which you can select when you create a project, and which will use your local clone of the Yocto Project. The local release requires some explanatory text, like all other available releases. You can get the local release text at http://www.yoctoproject.org/toaster/newproject.html
Patch submitted upstream to poky repository. toasterconf.json includes section for "Local" release.
Merged in master as toaster: add toaster layer configuration files with subsequent patches.
Verified on master: 07f2eca7e9f9163ec48d3a417d8ba885a84762f3