My spouse and I are going through a divorce. We have 4 mortgages - 3 are rental properties and 1 is our own home. He will be keeping the house and the 3 rental properties and we agreed on a lump sum he will buy me out with. He does not want to refinance to pay me out and is choosing to pay me out with his IRA and 401K instead. We agreed that he will "cash out" the money instead of rolling it into a retirement fund for me because I am planning on buying my own house and need the cash. He is also going to take the penalties incurred by doing this. If he is taking the penalties for the cash out, will I have to claim this as income and also get penalized?

If this is done right neither you nor he need to pay any penalties at all. What he needs to do is get a Qualified Domestic Relations Order (QDRO) from the court which specifies precisely what portion of his IRA or 401(k) is going to you. His attorney should be able to set this up. More info here:
401(k) and Divorce (http://www.401k.org/AboutPlans/GeneralInformation/401kandDivorce/tabid/66/Default.aspx)

Note that this must be done correctly, or he will end up having to pay the penalty (which leaves less for you). In this case he pays the penalty, not you.