X-Plane uses a technique called z-buffering to draw in 3-d. Basically for every pixel drawn on the screen, X-Plane remembers how far away from the viewer it is. When a new model is drawn, only pixels that are closer to the viewer are visible.
If X-Plane did not use Z-Buffering, then objects that were behind a hill would be drawn over the hill. With Z-buffering, the hill obscures the object even though it is drawn first.
In the picture on the left, the buildings are drawn in the order numbered. But Z-buffering assures that closer buildings appear on top. For example, building 7 is partly not drawn because building 6 is “closer” to the veiwer. On the right, Z-buffering is disabled; the effect is similar to overlaying paper cutouts.
A problem happens when you have a piece of your model overlaying the ground. Due to a lack of precision on the graphics card, in some places the model will be drawn over the ground, and in some cases the ground will be drawn over the model. This is called Z-Buffer Thrash.
In the picture above, the two helipads are objects that touch the terrain. On the left the polgon is thrashing with the terrain; on the right a polygon offset of 1 has been applied, so it draws cleanly.
For information on avoiding Z-buffer thrash in your object models, see the OBJ Overview article