All Israeli-Palestinian peace plans to date have proposed dividing Jerusalem. Unfortunately this idea is divorced from reality. In Jerusalem, Jewish and Palestinian neighborhoods aren't just an arm's width apart, the "border" runs right through shared buildings. This shouldn't surprise anyone; after all, Jerusalem has been a single city for thousands of years. Jerusalem has only ever been divided from 1948 though 1967 when Jordan occupied the old city.
Yaacov Lozowick has a brilliant series of posts on the issue, including a few short video tours of the proposed dividing line. Watch here and here. See his whole collection of posts here.
On the topic, I've previously proposed holding a referundum among Jerusalem's Arab population about whether they'd rather stay part of Israel or be incorporated into a Palestinian state. It's almost certain, they'd rather remain part of Israel. See here.