March 30, 2000



United States
Securities and Exchange Commission
Washington, D.C.  20549


RE:   Davidson Income Real Estate, L.P.
      Form 10-KSB
      File No. 0-14530


To Whom it May Concern:

The  accompanying  Form 10-KSB for the year ended  December 31, 1999 describes a
change in the method of  accounting to  capitalize  exterior  painting and major
landscaping,   which  would  have  been  expensed  under  the  old  policy.  The
Partnership believes that this accounting principle change is preferable because
it  provides a better  matching  of  expenses  with the  related  benefit of the
expenditures and it is consistent with industry practice and the policies of the
Managing General Partner.

Please do not hesitate to contact the undersigned with any questions or comments
that you might have.

Very truly yours,



Stephen Waters
Real Estate Controller


<PAGE>



                FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER

                               SECTION 13 OR 15(d)

                                   Form 10-KSB

(Mark  One)
[X]  ANNUAL  REPORT  UNDER  SECTION  13 OR  15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [No Fee Required]

                       For the fiscal year ended December 31, 1999

[ ] TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
    OF 1934 [No Fee Required]

                   For the transition period from _________to _________

                         Commission file number 0-14530

                        DAVIDSON INCOME REAL ESTATE, L.P.
                 (Name of small business issuer in its charter)

         Delaware                                                 62-1242144
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                          55 Beattie Place, PO Box 1089
                        Greenville, South Carolina 29602

                    (Address of principal executive offices)

                    Issuer's telephone number (864) 239-1000

         Securities registered under Section 12(b) of the Exchange Act:

                                      None

         Securities registered under Section 12(g) of the Exchange Act:

                          Units of Limited Partnership

                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of the  Partnership's  knowledge  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year.  $4,932,000

State the aggregate  market value of the voting  partnership  interests  held by
non-affiliates  computed  by  reference  to the price at which  the  partnership
interests  were sold,  or the average bid and asked  prices of such  partnership
interests as of December 31, 1999. No market exists for the limited  partnership
interests of the Registrant,  and,  therefore,  no aggregate market value can be
determined.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

<PAGE>
                                     PART I

Item 1.     Description of Business

Davidson  Income Real Estate,  L.P. (the  "Partnership"  or  "Registrant")  is a
Delaware  limited  partnership  organized in April 1985. The general partners of
the  Partnership  are  Davidson  Diversified   Properties,   Inc.,  a  Tennessee
corporation  ("Managing  General  Partner"),  David W.  Talley and James T. Gunn
(collectively,   "Individual  General  Partners")  (collectively,  the  "General
Partners").  The  Registrant is engaged in the business of operating and holding
real  estate  properties  for  investment.  The  Managing  General  Partner is a
subsidiary  of  Apartment  Investment  and  Management  Company  ("AIMCO").  The
Partnership  Agreement provides that the Partnership is to terminate on December
31, 2010, unless terminated prior to such date.

The offering of the Partnership's  limited partnership units ("Units") commenced
on July 26, 1985, and terminated on May 30, 1986. The Registrant  received gross
proceeds from the offering of $26,776,000 and net proceeds of  $25,700,160.  All
of the net  proceeds of the offering  were  invested in the  Partnership's  four
residential  properties  and in a 17.5% joint  venture  interest  which owns one
residential property.  See "Item 2. Description of Properties" for a description
of the Partnership's properties.

Both  the  income  and  expenses  of  operating  the  properties  owned  by  the
Partnership are subject to factors outside of the Partnership's control, such as
changes in the supply and demand for similar  properties  resulting from various
market  conditions,  increases/decreases  in unemployment or population  shifts,
changes in the availability of permanent mortgage  financing,  changes in zoning
laws,  or changes in patterns or needs of users.  In  addition,  there are risks
inherent in owning and operating residential  properties because such properties
are  susceptible to the impact of economic and other  conditions  outside of the
control of the Partnership.

The Registrant  has no employees.  Management  and  administrative  services are
provided by the Managing  General Partner and by agents retained by the Managing
General Partner. An affiliate of the Managing General Partner has been providing
such property management services.

The  real  estate  business  in which  the  Partnership  is  engaged  is  highly
competitive.  There are other  residential  properties within the market area of
the Partnership's properties.  The number and quality of competitive properties,
including  those which may be managed by an affiliate  of the  Managing  General
Partner,  in such market area could have a material  effect on the rental market
for the  apartments at the  Partnership's  properties  and the rents that may be
charged  for  such  apartments.  While  the  Managing  General  Partner  and its
affiliates  own and/or  control a significant  number of apartment  units in the
United  States,  such  units  represent  an  insignificant  percentage  of total
apartment  units in the United  States and  competition  for the  apartments  is
local.

There have been, and it is possible there may be other, Federal, state and local
legislation  and  regulations   enacted   relating  to  the  protection  of  the
environment.  The Partnership is unable to predict the extent,  if any, to which
such new  legislation  or  regulations  might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.

The Partnership  monitors its properties for evidence of pollutants,  toxins and
other dangerous substances, including the presence of asbestos. In certain cases
environmental  testing has been performed which resulted in no material  adverse
conditions or liabilities.  In no case has the Partnership  received notice that
it is a potentially  responsible party with respect to an environmental clean up
site.

A further description of the Partnership's business is included in "Management's
Discussion and Analysis or Plan of Operation"  included in "Item 6" of this Form
10-KSB.

Transfer of Control

Prior to  February  25, 1998 the  Managing  General  Partner was a  wholly-owned
subsidiary  of  MAE GP  Corporation  ("MAE  GP"),  which  was  wholly  owned  by
Metropolitan  Asset  Enhancement,  L.P.  Effective February 25, 1998, MAE GP was
merged into Insignia Properties Trust ("IPT"), thus the Managing General Partner
became a wholly-owned subsidiary of IPT.

Pursuant  to a series  of  transactions  which  closed  on  October  1, 1998 and
February 26, 1999,  Insignia  Financial Group, Inc. and IPT merged into AIMCO, a
publicly  traded real estate  investment  trust,  with AIMCO being the surviving
corporation (the "Insignia Merger"). As a result, AIMCO ultimately acquired 100%
ownership interest in the Managing General Partner. The Managing General Partner
does not believe that this transaction has had or will have a material effect on
the affairs and operations of the Partnership.

Item 2.     Description of Properties:

The following table sets forth the Partnership's investments in properties:
<TABLE>
<CAPTION>

                                  Date of
Property                          Purchase       Type of Ownership         Use

<S>                               <C>       <C>                         <C>
Northsprings Apartments           11/13/85   Fee ownership subject to   Apartment
  Atlanta, Georgia                           first and second           120 units
                                             mortgages (1)

Lakeside Apartments               05/20/86   Fee ownership subject to   Apartment
  Charlotte, North Carolina                  first mortgage             216 units

Bexley House Apartments           09/30/86   Fee ownership subject to   Apartment
  Columbus, Ohio                             first and second           64 units
                                             mortgages (1)

Covington Pointe Apartments       03/10/87   Fee ownership subject to   Apartment
  Dallas, Texas                              first and second           180 units
                                             mortgages (1)

Brighton Crest Apartments         Phase I    Registrant has a 17.5%     Apartment
  Marietta, Georgia               06/30/87   interest in the joint      320 units
                                             venture which has fee
                                  Phase II   ownership subject to
                                  12/15/87   first and second
                                             mortgages
</TABLE>

(1)  Property is held by a limited  partnership in which the Partnership  owns a
     100% interest.

Schedule of Properties:

Set forth below for each of the  Partnership's  properties is the gross carrying
value, accumulated depreciation,  depreciable life, method of depreciation,  and
Federal tax basis.
<TABLE>
<CAPTION>

                          Gross
                         Carrying    Accumulated                         Federal
Property                  Value     Depreciation     Rate    Method     Tax Basis
                             (in thousands)                          (in thousands)

<S>                      <C>           <C>         <C>                   <C>
Northsprings             $ 4,953       $ 2,550     5-25 yrs    S/L       $ 3,410
Lakeside                   6,806         3,315     5-25 yrs    S/L         4,539
Bexley House               3,930         1,913     5-25 yrs    S/L         2,629
Covington Pointe          10,079         4,245     5-25 yrs    S/L         6,697
                         $25,768       $12,023                           $17,275
</TABLE>

See  "Note A" to the  consolidated  financial  statements  included  in "Item 7.
Financial Statements" for a description of the Partnership's depreciation policy
and "Note L - Change in Accounting Principle".

Schedule of Property Indebtedness:

The  following  table  sets  forth  certain  information  relating  to the loans
encumbering the Partnership's properties.
<TABLE>
<CAPTION>

                       Principal                                         Principal
                       Balance At     Stated                              Balance
                      December 31,   Interest    Period     Maturity       Due At
     Property             1999         Rate     Amortized     Date      Maturity (2)
                     (in thousands)                                    (in thousands)
Northsprings
<S>                     <C>            <C>      <C>         <C>   <C>     <C>
  1st mortgage          $ 1,832        7.83%    28.67 yrs   10/15/03      $ 1,701
  2nd mortgage               61        7.83%       (1)      10/15/03           61
Lakeside
  1st mortgage            4,100        7.33%       (1)      11/01/03        4,100
Bexley House
  1st mortgage            1,204        7.60%    21.40 yrs   11/15/02        1,052
  2nd mortgage               45        7.60%       (1)      11/15/02           45
Covington Pointe
  1st mortgage            4,489        7.83%    28.67 yrs   10/15/03        4,169
  2nd mortgage              150        7.83%       (1)      10/15/03          150

Total                    11,881                                           $11,278
Less unamortized
  discounts                (101)

Total                   $11,780
</TABLE>

(1)   Payments consist of interest only.

(2)   See  "Note  D" of  the  consolidated  financial  statements  in  "Item  7.
      Financial  Statements" for information  with respect to the  Partnership's
      ability to repay these loans and other specific details about the loans.

Schedule of Rental Rate and Occupancy:

Average annual rental rates and occupancy for 1999 and 1998 for each property:

                                    Average Annual                  Average
                                     Rental Rates                  Occupancy
                                      (per Unit)

 Property                         1999            1998         1999         1998
 Northsprings                   $10,175         $ 9,823         97%          96%
 Lakeside                         6,804           6,550         93%          94%
 Bexley House                    12,102          11,784         94%          91%
 Covington Pointe                 9,682           9,547         93%          83%

The Managing  General Partner  attributes the increase in occupancy at Covington
Pointe  Apartments and Bexley House to an increase in advertising  and marketing
efforts.

As noted under "Item 1.  Description of Business",  the real estate  industry is
highly  competitive.  All of the  properties of the  Partnership  are subject to
competition from other residential apartment complexes in the area. The Managing
General Partner believes that all of the properties are adequately insured. Each
property is an  apartment  complex  which  leases units for terms of one year or
less.  No tenant leases 10% or more of the  available  rental space.  All of the
properties are in good physical  condition,  subject to normal  depreciation and
deterioration as is typical for assets of this type and age.

Schedule of Real Estate Taxes and Rates:

Real estate taxes and rates in 1999 for each property were:

                                            1999               1999
                                           Billing             Rate
                                       (in thousands)
       Northsprings                         $  89              3.95%
       Lakeside                                78              1.32%
       Bexley House                            99              8.17%
       Covington Pointe                       196              2.58%

Capital Improvements:

Northsprings Apartments

The  Partnership  completed  approximately  $103,000 in capital  expenditures at
Northsprings  Apartments as of December 31, 1999, consisting primarily of carpet
and  vinyl  replacement,  plumbing  and  pool  upgrades,  and  other  structural
improvements.  These  improvements  were  funded  from  operating  cash flow and
Partnership  reserves.  The  Partnership  is  currently  evaluating  the capital
improvement  needs of the property for the upcoming  year. The minimum amount to
be budgeted is expected to be $300 per unit or $36,000.  Additional improvements
may be considered  and will depend on the physical  condition of the property as
well  as  replacement  reserves  and  anticipated  cash  flow  generated  by the
property.

Lakeside Apartments

The  Partnership  completed  approximately  $284,000 in capital  expenditures at
Lakeside  Apartments  as of December  31,  1999,  consisting  primarily of major
landscaping,   plumbing  replacements,   roof  replacement,   carpet  and  vinyl
replacement,   parking  lot  upgrades,  pool  upgrades,  and  appliances.  These
improvements were funded from operating cash flow and Partnership reserves.  The
Partnership  is  currently  evaluating  the  capital  improvement  needs  of the
property for the upcoming year. The minimum amount to be budgeted is expected to
be $300 per unit or $64,800.  Additional improvements may be considered and will
depend on the physical condition of the property as well as replacement reserves
and anticipated cash flow generated by the property.

Bexley House Apartments

The  Partnership  completed  approximately  $106,000 in capital  expenditures at
Bexley House Apartments as of December 31, 1999, consisting primarily of parking
lot upgrades,  carpet and vinyl replacement,  air conditioning unit replacement,
exterior painting, and cabinet replacement.  These improvements were funded from
operating  cash flow and  Partnership  reserves.  The  Partnership  is currently
evaluating the capital  improvement needs of the property for the upcoming year.
The  minimum  amount to be  budgeted is expected to be $300 per unit or $19,200.
Additional  improvements  may be  considered  and will  depend  on the  physical
condition of the property as well as replacement  reserves and anticipated  cash
flow generated by the property.

Covington Pointe Apartments

The  Partnership  completed  approximately  $595,000 in capital  expenditures at
Covington  Pointe  Apartments as of December 31, 1999,  consisting  primarily of
exterior painting,  parking lot upgrades,  roof replacement,  perimeter fencing,
structural  upgrades,  carpet  and  vinyl  replacement,  air  conditioning  unit
replacement,  major  landscaping,  and pool upgrades.  These  improvements  were
funded from operating cash flow and  Partnership  reserves.  The  Partnership is
currently  evaluating  the capital  improvement  needs of the  property  for the
upcoming year. The minimum amount to be budgeted is expected to be $300 per unit
or $54,000.  Additional  improvements  may be considered  and will depend on the
physical  condition  of  the  property  as  well  as  replacement  reserves  and
anticipated cash flow generated by the property.

Item 3.     Legal Proceedings

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial  Group,  Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs  named as defendants,  among others,
the  Partnership,  the Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging  the  acquisition  by Insignia  Financial  Group,  Inc.
("Insignia")  and  entities  which  were,  at one time,  affiliates  of Insignia
("Insignia  Affiliates") of interests in certain general partner entities,  past
tender offers by Insignia  Affiliates to acquire limited  partnership units, the
management of partnerships  by Insignia  Affiliates and the Insignia Merger (see
"Item 7. Financial  Statements,  Note B - Transfer of Control").  The plaintiffs
seek monetary damages and equitable relief,  including  judicial  dissolution of
the  Partnership.  On June 25, 1998, the Managing General Partner filed a motion
seeking  dismissal  of the action.  In lieu of  responding  to the  motion,  the
plaintiffs have filed an amended  complaint.  The Managing General Partner filed
demurrers to the amended  complaint which were heard February 1999.  Pending the
ruling on such  demurrers,  settlement  negotiations  commenced.  On November 2,
1999,  the parties  executed and filed a  Stipulation  of  Settlement,  settling
claims,  subject to final court  approval,  on behalf of the Partnership and all
limited partners who own units as of November 3, 1999.  Preliminary  approval of
the  settlement  was obtained on November 3, 1999 from the Superior Court of the
State of  California,  County of San Mateo,  at which time the Court set a final
approval  hearing for December 10, 1999.  Prior to the December 10, 1999 hearing
the Court received various  objections to the settlement,  including a challenge
to the Court's preliminary  approval based upon the alleged lack of authority of
class  plaintiffs'  counsel to enter the  settlement.  On December 14, 1999, the
Managing General Partner and its affiliates  terminated the proposed settlement.
Certain  plaintiffs  have filed a motion to disqualify  some of the  plaintiffs'
counsel in the action.  The Managing  General  Partner does not anticipate  that
costs  associated with this case will be material to the  Partnership's  overall
operations.

The  Partnership is unaware of any other pending or outstanding  litigation that
is not of a routine nature arising in the ordinary course of business.

Item 4.     Submission of Matters to a Vote of Security Holders

During the quarter ended  December 31, 1999, no matters were submitted to a vote
of Unit holders through the solicitation of proxies or otherwise.

                                     PART II

Item 5.     Market for the Partnership Equity and Related Partner Matters

As of December 31, 1999,  there are 1,928  holders of record owning an aggregate
of 26,776 units. Affiliates of the Managing General Partner owned 9,710.50 Units
or 36.266% as of December  31, 1999.  No public  trading has  developed  for the
Units, and it is not anticipated that such a market will develop in the future.

The following table sets forth the distributions made by the Partnership for the
years ended December 31, 1998 and 1999 (see "Item 6. Management's Discussion and
Analysis or Plan of Operation" for further details):

                                                Distributions
                                                           Per Limited
                                        Aggregate        Partnership Unit
                                      (in thousands)

       01/01/98 - 12/31/98               $ 400 (1)            $14.49
       01/01/99 - 12/31/99               $ 655 (1)(2)         $23.72

(1)  Distributions were made from cash from operations.

(2)  Of this  amount,  $380,000  was  accrued at  December  31, 1999 and paid in
     January 2000.

Future cash  distributions  will depend on the levels of net cash generated from
operations,   the  availability  of  cash  reserves,  and  the  timing  of  debt
maturities,  refinancings, and/or property sales. The Partnership's distribution
policy is reviewed on a quarterly  basis.  There can be no  assurance,  however,
that the  Partnership  will  generate  sufficient  funds from  operations  after
required  capital  expenditures to permit any  distributions  to its partners in
2000 or subsequent  periods.  See "Item 2.  Description  of Properties - Capital
Improvements" for information  relating to anticipated  capital  expenditures at
the  properties.  In addition,  the  Partnership  may be restricted  from making
distributions if the amount in the reserve account for each property  maintained
by the mortgage  lender is less than $400 per  apartment  unit at  Northsprings,
Covington Pointe,  and Bexley House for a total of $145,600.  As of December 31,
1999 the reserve  accounts  were not fully  funded for all of these  properties;
however, the minimum balance was attained subsequent to December 31, 1999.

Several tender offers were made by various parties,  including affiliates of the
Managing General Partner,  during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 9,710.50
limited partnership units in the Partnership representing  approximately 36.266%
of the outstanding  units. It is possible that AIMCO or its affiliates will make
one  or  more  additional  offers  to  acquire  additional  limited  partnership
interests in the  Partnership for cash or in exchange for units in the operating
partnership of AIMCO.  Under the Partnership  Agreement,  unitholders  holding a
majority of the Units are  entitled to take action with  respect to a variety of
matters. When voting on matters, AIMCO would in all likelihood vote the Units it
acquired in a manner  favorable to the interest of the Managing  General Partner
because of their affiliation with the Managing General Partner.

Item 6.     Management's Discussion and Analysis or Plan of Operation

The  matters  discussed  in this Form  10-KSB  contain  certain  forward-looking
statements  and  involve  risks and  uncertainties  (including  changing  market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained  in this Form 10-KSB and the other  filings  with the  Securities  and
Exchange  Commission made by the Registrant from time to time. The discussion of
the Partnership's business and results of operations,  including forward-looking
statements pertaining to such matters, does not take into account the effects of
any changes to the Registrant's business and results of operation.  Accordingly,
actual   results   could  differ   materially   from  those   projected  in  the
forward-looking  statements as a result of a number of factors,  including those
identified herein.

This  item  should  be read  in  conjunction  with  the  consolidated  financial
statements and other items contained elsewhere in this report.

Results of Operations

The  Partnership's  net  income  as  reported  in  the  consolidated   financial
statements  for the year ended  December 31, 1999,  was  approximately  $463,000
compared to net income of approximately $36,000 for the year ending December 31,
1998.  The  increase in net income is primarily  attributable  to an increase in
total  revenues and, to a lesser  extent,  a decrease in total  expenses.  Total
revenues  increased  due to increased  rental  income and other  income.  Rental
income increased primarily due to the increase in average rental rates at all of
the  Partnership's   investment  properties,   and  increases  in  occupancy  at
Northsprings,  Bexley  House,  and  Covington  Pointe which more than offset the
decrease in occupancy at Lakeside  and the increase in  concession  costs at all
the  Partnership's  properties.  Other  income  increased  primarily  due  to an
increase in tenant charges at Covington Pointe.

Total  expenses  decreased  due to a decrease in  operating  expenses  which was
partially  offset by an increase in  depreciation  expense.  Operating  expenses
decreased  mainly  due to  lower  insurance  and  maintenance  costs  at all the
Partnership's properties. Insurance expense decreased due to lower premiums as a
result  of a  change  in  insurance  carriers  late in 1998.  Maintenance  costs
decreased primarily due to interior and exterior building improvements completed
at the properties in 1998. Depreciation expense increased due to the increase in
capital expenditures throughout 1999.

Included in general and  administrative  expenses at both  December 31, 1999 and
1998 are management reimbursements to the Managing General Partner allowed under
the Partnership Agreement. In addition,  costs associated with the quarterly and
annual  communications  with  investors and  regulatory  agencies and the annual
audit required by the Partnership Agreement are also included.

Effective  January 1, 1999, the Partnership  changed its method of accounting to
capitalize the cost of exterior  painting and major landscaping on a prospective
basis.  The  Partnership  believes  that  this  accounting  principle  change is
preferable  because it provides a better  matching of expenses  with the related
benefit of the expenditures and it is consistent with industry  practice and the
policies of the Managing General  Partner.  The effect of the change in 1999 was
to increase net income by approximately  $257,000 ($9.31 per limited partnership
unit). The cumulative effect, had this change been applied to prior periods,  is
not material.  The accounting  principle  change will not have an effect on cash
flow,  funds available for  distribution or fees payable to the Managing General
Partner and affiliates.

As part of the ongoing  business plan of the  Partnership,  the Managing General
Partner  monitors  the  rental  market  environment  of each  of its  investment
properties  to assess  the  feasibility  of  increasing  rents,  maintaining  or
increasing  occupancy  levels and protecting the  Partnership  from increases in
expenses. As part of this plan, the Managing General Partner attempts to protect
the Partnership  from the burden of  inflation-related  increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due to
changing market  conditions,  which can result in the use of rental  concessions
and  rental  reductions  to  offset  softening  market  conditions,  there is no
guarantee that the Managing General Partner will be able to sustain such a plan.

Liquidity and Capital Resources

At  December  31,  1999,  the  Partnership  had  cash and  cash  equivalents  of
approximately  $1,675,000  compared to  approximately  $920,000 at December  31,
1998. The net increase in cash and cash  equivalents for the year ended December
31, 1999 was  approximately  $755,000 from the prior year.  The increase in cash
and cash  equivalents  is due to  approximately  $1,670,000  of cash provided by
operating  activities,  which was partially offset by approximately  $496,000 of
cash used in investing  activities  and  approximately  $419,000 of cash used in
financing  activities.  Cash used in investing activities consisted primarily of
property  improvements  and  replacements  which  were  partially  offset by net
withdrawals  from  escrow  accounts   maintained  by  the  mortgage  lender  and
distributions received from the joint venture. Cash used in financing activities
consisted  of  distributions  to the  partners  and  principal  payments  on the
mortgages encumbering the Partnership's properties.  The Partnership invests its
working capital reserves in money market accounts.

The sufficiency of existing  liquid assets to meet future  liquidity and capital
expenditure   requirements   is  directly   related  to  the  level  of  capital
expenditures  required at the  properties  to  adequately  maintain the physical
assets and other  operating needs of the Partnership and to comply with Federal,
state, and local legal and regulatory requirements. The Partnership is currently
evaluating  the  capital  improvement  needs of each of its  properties  for the
upcoming year. The minimum amount to be budgeted for the Partnership is expected
to be $300 per unit or $174,000.  Additional  improvements may be considered and
will depend on the physical  condition  of the  property as well as  replacement
reserves and anticipated cash flow generated by the property.

The  additional  capital  expenditures  for the year  2000 at the  Partnership's
properties  will be incurred only if cash is available  from  operations or from
Partnership  reserves. To the extent that such budgeted capital improvements are
completed,  the Partnership's  distributable cash flow, if any, may be adversely
affected at least in the short term.

The Partnership's  current assets are thought to be sufficient for any near-term
needs  (exclusive  of capital  improvements)  of the  Partnership.  The mortgage
indebtedness of approximately  $11,780,000,  net of discounts, is amortized over
varying periods with balloon payments of  approximately  $1,097,000 due November
2002 and  approximately  $10,181,000 due by November 2003. The Managing  General
Partner  will  attempt to  refinance  and/or sell the  properties  prior to such
maturity dates. If the properties  cannot be refinanced or sold for a sufficient
amount, the Partnership will risk losing such properties through foreclosure.

The  Partnership  distributed  cash from  operations of  approximately  $275,000
(approximately $267,000 to the limited partners or $9.97 per limited partnership
unit)  during the year ended  December  31,  1999.  At December  31,  1999,  the
Partnership  declared a distribution  of cash from  operations of  approximately
$380,000  (approximately  $368,000 to the limited partners or $13.75 per limited
partnership  unit).  This distribution was paid in January 2000. During the year
ended December 31, 1998, the  Partnership  distributed  cash from  operations of
approximately $400,000 (approximately $388,000 to the limited partners or $14.49
per limited  partnership  unit).  Future cash  distributions  will depend on the
levels of net cash generated from operations, the availability of cash reserves,
and the timing of debt  maturities,  refinancing,  and/or  property  sales.  The
Partnership's distribution policy is reviewed on a quarterly basis. There can be
no assurance,  however, that the Partnership will generate sufficient funds from
operations  after required capital  expenditures to permit  distributions to its
partners in the year 2000 or subsequent  periods.  In addition,  the Partnership
may be restricted from making distributions if the amount in the reserve account
for each  property  maintained  by the  mortgage  lender  is less  than $400 per
apartment unit at Northsprings,  Covington Pointe,  and Bexley House for a total
of $145,600.  As of December 31, 1999 the reserve accounts were not fully funded
for  all  of  these  properties;  however,  the  minimum  balance  was  attained
subsequent to December 31, 1999.

Several tender offers were made by various parties,  including affiliates of the
Managing General Partner,  during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 9,710.50
limited partnership units in the Partnership representing  approximately 36.266%
of the outstanding  units. It is possible that AIMCO or its affiliates will make
one  or  more  additional  offers  to  acquire  additional  limited  partnership
interests in the  Partnership for cash or in exchange for units in the operating
partnership of AIMCO.  Under the Partnership  Agreement,  unitholders  holding a
majority of the Units are  entitled to take action with  respect to a variety of
matters. When voting on matters, AIMCO would in all likelihood vote the Units it
acquired in a manner  favorable to the interest of the Managing  General Partner
because of their affiliation with the Managing General Partner.

Year 2000 Compliance

General Description

The Year 2000 issue is the result of computer  programs  being written using two
digits rather than four digits to define the applicable year. The Partnership is
dependent  upon the Managing  General  Partner and its affiliates for management
and  administrative  services  ("Managing  Agent").  Any of the Managing Agent's
computer programs or hardware that had date-sensitive software or embedded chips
might have  recognized  a date using "00" as the year 1900  rather than the year
2000.  This could have resulted in a system failure or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to process  transactions,  send invoices,  or engage in similar normal  business
activities.

Computer Hardware, Software and Operating Equipment

In 1999,  the Managing  Agent  completed  all phases of its Year 2000 program by
completing  the  replacement  and repair of any  hardware or software  system or
operating  equipment that was not yet Year 2000 compliant.  The Managing Agent's
hardware  and software  systems and its  operating  equipment  are now Year 2000
compliant.  No  material  failure or  erroneous  results  have  occurred  in the
Managing Agent's computer  applications  related to the failure to reference the
Year 2000 to date.

Third Parties

To  date,  the  Managing  Agent  is not  aware of any  significant  supplier  or
subcontractor  (external agent) or financial institution of the Partnership that
has a Year 2000 issue that  would  have a material  impact on the  Partnership's
results of operations,  liquidity or capital  resources.  However,  the Managing
Agent  has no means of  ensuring  or  determining  the Year 2000  compliance  of
external  agents.  At this time, the Managing Agent does not believe that a Year
2000 issue of any  non-compliant  external agent will have a material  impact on
the Partnership's financial position or results of operations.

Costs

The total cost of the Managing Agent's Year 2000 project was approximately  $3.2
million and was funded from operating cash flows.

Risks Associated with the Year 2000

The Managing  Agent  completed all necessary  phases of its Year 2000 program in
1999,  and did not  experience  system or  equipment  malfunctions  related to a
failure to reference the Year 2000. The Managing  Agent or Partnership  have not
been  materially  adversely  effected by  disruptions  in the economy  generally
resulting from the Year 2000 issue.

At this  time,  the  Managing  Agent  does not  believe  that the  Partnership's
businesses,  results of  operations  or financial  condition  will be materially
adversely effected by the Year 2000 issue.

Contingency Plans Associated with the Year 2000

The  Managing  Agent has not had to implement  contingency  plans such as manual
workarounds or selecting new relationships for its banking or elevator operation
activities in order to avoid the Year 2000 issue.

<PAGE>

Item 7.     Financial Statements

DAVIDSON INCOME REAL ESTATE, L.P.

LIST OF CONSOLIDATED FINANCIAL STATEMENTS


Report of Ernst & Young LLP, Independent Auditors

Consolidated Balance Sheet - December 31, 1999

Consolidated Statements of Operations - Years ended December 31, 1999 and 1998

Consolidated  Statements of Changes in Partners' (Deficit) Capital - Years ended
December 31, 1999 and 1998

Consolidated Statements of Cash Flows - Years ended December 31, 1999 and 1998

Notes to Consolidated Financial Statements

<PAGE>

                    Report of Ernst & Young LLP, Independent Auditors

The Partners
Davidson Income Real Estate, L.P.


We have audited the accompanying  consolidated  balance sheet of Davidson Income
Real  Estate,  L.P.  as of  December  31,  1999,  and the  related  consolidated
statements of operations,  changes in partners' (deficit) capital and cash flows
for each of the two years in the period ended December 31, 1999. These financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made  by the  Partnership's  management,  as  well  as  evaluating  the  overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Davidson Income
Real  Estate,  L.P. at December 31, 1999,  and the  consolidated  results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 1999, in conformity with accounting  principles  generally accepted
in the United States.

As discussed in Note L to the consolidated financial statements, the Partnership
changed its method of accounting to capitalize the cost of exterior painting and
major landscaping effective January 1, 1999.

                                                            /s/ERNST & YOUNG LLP

Greenville, South Carolina
February 25, 2000

<PAGE>

                        DAVIDSON INCOME REAL ESTATE, L.P.

                           CONSOLIDATED BALANCE SHEET

                        (in thousands, except unit data)

                                December 31, 1999
<TABLE>
<CAPTION>

Assets
<S>                                                                         <C>
   Cash and cash equivalents                                                $  1,675
   Receivables and deposits                                                      360
   Restricted escrows                                                            157
   Other assets                                                                  245
   Investment properties (Note G):
      Land                                                    $  4,120
      Buildings and related personal property                   21,648
                                                                25,768
      Less accumulated depreciation                            (12,023)       13,745

   Investment in joint venture (Note C)                                          110
                                                                            $ 16,292

Liabilities and Partners' (Deficit) Capital
Liabilities
      Accounts payable                                                       $   386
      Tenant security deposit liabilities                                         84
      Accrued property taxes                                                     401
      Distribution payable                                                       380
      Other liabilities                                                          160
      Mortgage notes payable (Notes D and G)                                  11,780

Partners' (Deficit) Capital
   General partners                                            $  (678)
   Limited partners (26,776 units issued and
      outstanding)                                               3,779         3,101
                                                                            $ 16,292
</TABLE>

              See Accompanying Notes to Consolidated Financial Statements

<PAGE>

                        DAVIDSON INCOME REAL ESTATE, L.P.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                        (in thousands, except unit data)


<TABLE>
<CAPTION>

                                                           Years Ended December 31,
                                                              1999         1998
Revenues:
<S>                                                          <C>          <C>
   Rental income                                             $ 4,691      $ 4,427
   Other income                                                  241          210
      Total revenues                                           4,932        4,637

Expenses:
   Operating                                                   1,903        2,107
   General and administrative                                    233          226
   Depreciation                                                  968          906
   Interest                                                      992        1,002
   Property taxes                                                461          443
      Total expenses                                           4,557        4,684

Equity in income of joint venture                                 88           83

Net income (Note E)                                            $ 463         $ 36

Net income allocated to general partners (3%)                   $ 14          $ 1

Net income allocated to limited partners (97%)                   449           35

                                                               $ 463         $ 36

Net income per limited partnership unit                      $ 16.77       $ 1.31

Distributions per limited partnership unit                   $ 23.72      $ 14.49
</TABLE>

              See Accompanying Notes to Consolidated Financial Statements

<PAGE>


                            DAVIDSON INCOME REAL ESTATE, L.P.

            CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
                             (in thousands, except unit data)
<TABLE>
<CAPTION>

                                        Limited
                                       Partnership    General    Limited
                                          Units       Partners   Partners     Total

<S>                                       <C>           <C>       <C>        <C>
Original capital contributions            26,776        $   1     $26,776    $26,777

Partners' (deficit) capital at
  December 31, 1997                       26,776       $ (661)    $ 4,318    $ 3,657

Distribution to partners                      --          (12)       (388)      (400)

Net income for the year ended
  December 31, 1998                           --            1          35         36

Partners' (deficit) capital at
  December 31, 1998                       26,776         (672)      3,965      3,293

Distributions to partners                     --          (20)       (635)      (655)

Net income for the year ended
  December 31, 1999                           --           14         449        463

Partners' (deficit) capital at
  December 31, 1999                       26,776       $ (678)    $ 3,779    $ 3,101
</TABLE>

              See Accompanying Notes to Consolidated Financial Statements
<PAGE>


                        DAVIDSON INCOME REAL ESTATE, L.P.

                      CONSOLDIATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
<TABLE>
<CAPTION>

                                                              Years Ended December 31,
                                                                  1999        1998
Cash flows from operating activities:
<S>                                                               <C>           <C>
  Net income                                                      $ 463         $ 36
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Depreciation                                                   968          906
     Amortization of discounts and loan costs                        81           78
     Equity in income of joint venture                              (88)         (83)
     Change in accounts:
      Receivables and deposits                                      128          (45)
      Other assets                                                  (41)          16
      Accounts payable                                               92          (70)
      Tenant security deposit liabilities                             2          (11)
      Accrued property taxes                                         30           99
      Other liabilities                                              35           10
          Net cash provided by operating activities               1,670          936

Cash flows from investing activities:
  Property improvements and replacements                           (845)        (393)
  Net withdrawals from restricted escrows                           155            3
  Distributions from joint venture                                  194          131
          Net cash used in investing activities                    (496)        (259)

Cash flows from financing activities:
  Payments on mortgage notes payable                               (144)        (133)
  Distributions to partners                                        (275)        (400)
          Net cash used in financing activities                    (419)        (533)

Net increase in cash and cash equivalents                           755          144

Cash and cash equivalents at beginning of year                      920          776

Cash and cash equivalents at end of year                        $ 1,675        $ 920

Supplemental disclosure of cash flow information:
  Cash paid for interest                                          $ 913        $ 924

Supplemental disclosure of non-cash activity:
  Distribution payable                                            $ 380        $  --

  Property improvements and replacements included in
   accounts payable                                               $ 243        $  --
</TABLE>

              See Accompanying Notes to Consolidated Financial Statements

<PAGE>

                        DAVIDSON INCOME REAL ESTATE, L.P.

                   Notes to Consolidated Financial Statements

                                December 31, 1999

Note A - Organization and Significant Accounting Policies

Organization

Davidson  Income Real Estate,  L.P. (the  "Partnership"  or  "Registrant")  is a
Delaware  limited  partnership  organized  in April 1985 to acquire  and operate
residential real estate  properties.  The general partners of the Registrant are
Davidson  Diversified  Properties,  Inc.,  a  Tennessee  corporation  ("Managing
General Partner"), David W. Talley and James T. Gunn (collectively,  "Individual
General Partners") (collectively,  the "General Partners"). The Partnership owns
and  operates  four  apartment  properties  located in the  Mid-West,  South and
Southeast  and  owns a joint  venture  interest  in an  entity  which  owns  one
residential property.  The Managing General Partner is a subsidiary of Apartment
Investment  and  Management  Company  ("AIMCO")  (See  "Note  B  -  Transfer  of
Control"). The directors and officers of the Managing General Partner also serve
as executive  officers of AIMCO.  The  Partnership  Agreement  provides that the
Partnership  is to terminate on December 31, 2010,  unless  terminated  prior to
such date.

Principles of Consolidation

The  consolidated  financial  statements  of the  Partnership  include  its 100%
ownership  interests  in the  following  partnerships:  Bexley  House,  L.P. and
Davidson IRE  Associates,  L.P. All significant  interpartnership  balances have
been eliminated.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

Allocations to Partners

Net income (loss) of the Partnership and taxable income (loss) are allocated 97%
to the limited partners and 3% to the General Partners,  except for such amounts
which  are  allocated  prior  to  the  Partnership  meeting  the  minimum  close
requirements as defined in the Partnership Agreement. Distributions of available
cash from  operations  are allocated  97% to the limited  partners and 3% to the
General  Partners.  Cash from sales or refinancing  are allocated 97% to limited
partners and 3% to General  Partners until the limited partners have received an
amount of cumulative  distributions  from sales or refinancings that equal their
original  invested  capital  plus an  amount  which,  when  added  to the  prior
distributions  to  limited  partners,  will equal 12% per annum  cumulative  and
noncompounded  on  adjusted  invested  capital,  as defined  in the  Partnership
Agreement.  Thereafter,  upon payment to an  affiliate  of the General  Partners
certain  real  estate  commissions  and  incentive  fees  as  described  in  the
Partnership  Agreement,  remaining cash from sales or refinancings are allocated
97% to the limited partners and 3% to General  Partners.  In connection with the
liquidation  of the  Partnership,  cash  from  sales  or  refinancings  and  any
remaining working capital reserves shall be allocated among, and distributed to,
the  partners in  proportion  to, and to the extent of, their  positive  capital
account balances.

<PAGE>
Restricted Escrows

      Capital  Improvement  Reserve - At the time of the refinancing of Lakeside
      Apartments' mortgage note payable,  approximately $198,000 of the proceeds
      were  designated for a "capital  improvement  reserve" for certain capital
      improvements.  At December 31,  1999,  approximately  $69,000  remained in
      escrow for future capital  improvements  of which any excess funds will be
      returned for property  operations  once all  designated  improvements  are
      completed.

      Reserve  Account - A general  reserve  account  was  established  with the
      refinancing  and financing  proceeds of  Northsprings,  Bexley House,  and
      Covington Pointe.  These funds were established to cover necessary repairs
      and replacements of existing  improvements,  debt services,  out-of-pocket
      expenses  incurred for ordinary and necessary  administrative  tasks,  and
      payments of real property taxes and insurance  premiums.  The  Partnership
      was required to deposit net  operating  income (as defined in the mortgage
      notes) from the  properties to the respective  reserve  accounts until the
      reserve  accounts equal the minimum balance of $400 per apartment unit and
      a maximum balance of $1,000 per apartment unit for Northsprings, Covington
      Pointe,  and Bexley House.  The minimum balance of $400 per apartment unit
      was not attained at December 31,  1999,  as the balance was  approximately
      $88,000;  however, the minimum balance was attained subsequent to December
      31, 1999.

Escrows  for Taxes - These  escrows are held by the  mortgage  lender for Bexley
House, Covington Pointe, and Northsprings.  The funds, which total approximately
$261,000,  are included in receivables  and deposits.  These escrows are held by
the  Partnership  for Lakeside and total  $85,000  which is included in cash and
cash equivalents.

Investment Properties

Investment properties,  which consist of four apartment complexes, are stated at
cost.  Acquisition fees are capitalized as a cost of real estate.  In accordance
with Statement of Financial  Accounting  Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", the  Partnership  records  impairment  losses on long-lived  assets used in
operations  when  events and  circumstances  indicate  that the assets  might be
impaired  and the  undiscounted  cash flows  estimated  to be generated by those
assets are less than the carrying  amounts of those assets.  No adjustments  for
impairment of value were recorded in the years ended December 31, 1999 and 1998.

Depreciation

Depreciation is provided by the straight-line method over the estimated lives of
the investment properties and related personal property.  For Federal income tax
purposes,  the  accelerated  cost recovery  method is used (1) for real property
over 18 years for additions after March 15, 1984, and before May 9, 1985, and 19
years for additions  after May 8, 1985,  and before January 1, 1987, and (2) for
personal  property  over 5 years for  additions  prior to January 1, 1987.  As a
result of the Tax Reform Act of 1986, for additions after December 31, 1986, the
modified  accelerated  cost recovery method is used for depreciation of (1) real
property additions over 27 1/2 years, and (2) personal property additions over 5
years.

Effective  January 1, 1999, the Partnership  changed its method of accounting to
capitalize the costs of exterior painting and major landscaping ("Note L").

Cash and Cash Equivalents

Includes cash on hand, in banks and money market accounts. At certain times, the
amount of cash deposited at a bank may exceed the limit on insured deposits.

Tenant Security Deposits

The Partnership  requires security deposits from lessees for the duration of the
lease and such deposits are included in receivables  and deposits.  The security
deposits  are  refunded  when the tenant  vacates,  provided  the tenant has not
damaged its space and is current on rental payments.

Loan Costs

Loan  costs  of  approximately   $499,000  less   accumulated   amortization  of
approximately $300,000 are included in other assets and are being amortized on a
straight-line basis over the life of the respective loans.

Leases

The Partnership generally leases apartment units for twelve-month terms or less.
The  Partnership  recognizes  income  as earned on its  residential  leases.  In
addition,  the Managing General Partner's policy is to offer rental  concessions
during  particularly  slow months or in response to heavy competition from other
similar complexes in the area.  Concessions are charged against rental income as
incurred.

Joint Venture

The Partnership  accounts for its investment in the Sterling Crest Joint Venture
using the equity method of accounting (see "Note C" for further discussion).

Segment Reporting

SFAS  No.  131,   "Disclosure  about  Segments  of  an  Enterprise  and  Related
Information"  established standards for the way that public business enterprises
report information about operating  segments in annual financial  statements and
required that those  enterprises  report  selected  information  about operating
segments in interim financial reports. It also establishes standards for related
disclosures about products and services,  geographic areas, and major customers.
See "Note J" for required disclosure.

Advertising

The  Partnership  expenses the costs of  advertising  as  incurred.  Advertising
expense, included in operating expenses, was approximately $128,000 and $135,000
for the years ended December 31, 1999 and 1998, respectively.

Fair Value of Financial Statements

SFAS No. 107 "Disclosures about Fair Value of Financial Instruments", as amended
by SFAS No. 119,  "Disclosures about Derivative  Financial  Instruments and Fair
Value of Financial  Instruments",  requires disclosure of fair value information
about financial  instruments whether or not recognized in the balance sheet, for
which it is  practicable  to estimate  fair value.  Fair value is defined in the
SFAS as the  amount at which the  instruments  could be  exchanged  in a current
transaction between willing parties, other than in a forced or liquidation sale.
The Partnership  believes that the carrying amount of its financial  instruments
(except for long term debt)  approximates their fair value due to the short term
maturity of these  instruments.  The fair value of the  Partnership's  long term
debt,  after  discounting  the  scheduled  loan  payments to  maturity  based on
borrowing  rates  currently  available  to  the  Partnership,  approximates  its
carrying amount.

Note B - Transfer of Control

Prior to  February  25,  1998 the  Managing  General  Parter was a  wholly-owned
subsidiary  of  MAE GP  Corporation  ("MAE  GP"),  which  was  wholly  owned  by
Metropolitan  Asset  Enhancement,  L.P.  Effective February 25, 1998, MAE GP was
merged into Insignia Properties Trust ("IPT"), thus the Managing General Partner
became a wholly-owned subsidiary of IPT.

Pursuant  to a series  of  transactions  which  closed  on  October  1, 1998 and
February 26, 1999,  Insignia  Financial Group, Inc. and IPT merged into AIMCO, a
publicly  traded real estate  investment  trust,  with AIMCO being the surviving
corporation (the "Insignia Merger"). As a result, AIMCO ultimately acquired 100%
ownership interest in the Managing General Partner. The Managing General Partner
does not believe that this transaction has had or will have a material effect on
the affairs and operations of the Partnership.

Note C - Investment in Joint Venture

The  Partnership  owns a 17.5% interest in the Sterling Crest Joint Venture with
Davidson Growth Plus, L.P., an affiliate of the Managing General Partner,  which
owns the remaining  82.5% of the joint  venture.  In  connection  with the joint
venture's purchase of Phase I of Brighton Crest Apartments on June 30, 1987, the
Partnership  invested  approximately  $2,727,000 in the joint venture. The joint
venture purchased Phase II of Brighton Crest Apartments on December 15, 1987.

Summary  balance sheet  information  for the year ended December 31, 1999 of the
Sterling Crest Joint Venture is as follows (in thousands):

                Total assets                           $ 7,665
                Total liabilities                       (6,041)

                Total venture's equity                 $ 1,624

Summary statement of operations information for the year ended December 31, 1999
and 1998 of the Sterling Crest Joint Venture is as follows (in thousands):

                                                 1999            1998

                Total revenues                 $ 2,585          $ 2,500
                Total expenses                  (2,084)          (2,064)

                                                $  501           $  436

In 1999 and  1998,  the  Partnership  received  distributions  of  approximately
$194,000 and $131,000,  respectively,  from the joint venture. In 1999 and 1998,
the  Partnership  recognized  equity  in the  income  of the  joint  venture  of
approximately $88,000 and $83,000, respectively.

<PAGE>

Note D - Mortgage Notes Payable

The principle terms of mortgage notes payable are as follows:
<TABLE>
<CAPTION>

                        Principal      Monthly                           Principal
                        Balance At     Payment     Stated                 Balance
                       December 31,   Including   Interest  Maturity       Due At
      Property             1999       Interest      Rate      Date        Maturity
                            (in thousands)                             (in thousands)
Northsprings
<S>                      <C>            <C>          <C>      <C>        <C>
  1st mortgage           $ 1,832        $ 14         7.83%    10/15/03    $ 1,701
  2nd mortgage                61          (a)        7.83%    10/15/03         61
Lakeside                   4,100          25         7.33%    11/01/03      4,100
Bexley House
  1st mortgage             1,204          12       7.60%    11/15/02        1,052
  2nd mortgage                45          (a)      7.60%    11/15/02           45
Covington Pointe
  1st mortgage             4,489          35       7.83%    10/15/03        4,169
  2nd mortgage               150           1       7.83%    10/15/03          150
                          11,881                                          $11,278
Less unamortized
  discounts                 (101)

Total                    $11,780
</TABLE>

(a)   Monthly payment is less than $1,000.

The mortgage  notes  payable are  non-recourse  and are secured by pledge of the
respective  apartment  properties  and by pledge of revenues from the respective
apartment  properties.  Certain of the notes  require  prepayment  penalties  if
repaid  prior to  maturity  and  prohibit  resale of the  properties  subject to
existing indebtedness.

The Partnership  exercised  interest rate buy-down  options  reducing the stated
rate from  8.76% to 7.60% for Bexley  House and 8.13% to 7.83% for  Northsprings
and  Covington   Pointe.   The  fees  for  the  interest  rate  reductions  were
approximately  $243,000  and are being  amortized  as loan  discounts  using the
effective  interest  method over the lives of the loans.  The discount  fees are
reflected  as a  reduction  of the  mortgage  notes  payable  and  increase  the
effective rate of the debt to 8.76% for Bexley House and 8.13% for  Northsprings
and Covington Pointe.

Scheduled  principal  payments  of the  mortgage  notes  payable  subsequent  to
December 31, 1999 are as follows (in thousands):

                               2000              $  156
                               2001                 168
                               2002               1,275
                               2003              10,282

                                                $11,881

Note E - Income Taxes

The Partnership  received a ruling from the Internal  Revenue Service that it is
to be classified as a partnership for Federal income tax purposes.  Accordingly,
no provision for income taxes is made in the consolidated  financial  statements
of the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.

The  following is a  reconciliation  of reported net income and Federal  taxable
income (in thousands, except per unit data):

                                    1999          1998

Net income as reported             $  463          $ 36
Add (deduct)
  Depreciation differences           (143)           28
  Equity in joint venture              (6)          (11)
  Prepaid rents                       (27)            4
  Miscellaneous                         7             6

Federal taxable income             $  294          $ 63

Federal taxable income per
  limited partnership unit         $10.65        $ 2.29

The following is a reconciliation between the Partnership's reported amounts and
Federal  tax basis of net assets and  liabilities  as of  December  31, 1999 (in
thousands):

Net assets as reported                                 $ 3,101
Land and buildings                                       3,169
Accumulated depreciation                                   361
Syndication                                              3,809
Other                                                    1,300

Net assets - Federal tax basis                         $11,740

Note F - Transactions with Affiliated Parties

The  Partnership  has no employees  and is  dependent  on the  Managing  General
Partner  and  its  affiliates  for  the  management  and  administration  of all
Partnership  activities.  The  Partnership  Agreement  provides  for payments to
affiliates for property  management  services and for  reimbursement  of certain
expenses  incurred by  affiliates  on behalf of the  Partnership.  The following
transactions  with the  Managing  General  Partner  and/or its  affiliates  were
incurred during each of the years ended December 31, 1999 and 1998:

<PAGE>

                                                       1999        1998
                                                        (in thousands)
Property management fees (included in
  operating expenses)                                 $ 251       $ 235
Reimbursement for services of affiliates
  (included in general and administrative expense,
  operating expense and investment properties)          110         133

During the years ended  December 31, 1999 and 1998,  affiliates  of the Managing
General  Partner were  entitled to receive 5% of gross  receipts from all of the
Partnership's  properties  as  compensation  for providing  property  management
services.  The Partnership  paid to such affiliates  approximately  $251,000 and
$235,000 for the years ended December 31, 1999 and 1998, respectively.

An  affiliate  of  the  Managing  General  Partner  received   reimbursement  of
accountable  administrative  expenses  amounting to  approximately  $110,000 and
$133,000 for the years ended December 31, 1999 and 1998, respectively.

On September 25, 1997, an affiliate of the Managing  General  Partner  purchased
Lehman  Brothers' Class "D" subordinated  bonds of SASCO,  1992, M1. These bonds
are  secured by 55  multi-family  apartment  mortgage  loan pairs held in Trust,
including Bexley House Apartments owned by the Partnership.

Several tender offers were made by various parties,  including affiliates of the
Managing General Partner,  during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 9,710.50
limited partnership units in the Partnership representing  approximately 36.266%
of the outstanding  units. It is possible that AIMCO or its affiliates will make
one  or  more  additional  offers  to  acquire  additional  limited  partnership
interests in the  Partnership for cash or in exchange for units in the operating
partnership of AIMCO.  Under the Partnership  Agreement,  unitholders  holding a
majority of the Units are  entitled to take action with  respect to a variety of
matters. When voting on matters, AIMCO would in all likelihood vote the Units it
acquired in a manner  favorable to the interest of the Managing  General Partner
because of their affiliation with the Managing General Partner.

<PAGE>

Note G - Investment Properties and Accumulated Depreciation
<TABLE>
<CAPTION>

                                               Initial Cost
                                              To Partnership
                                              (in thousands)
                                                                         Net Cost
                                                        Buildings      Capitalized
                                                       and Related    (Written Down)
                                                        Personal      Subsequent to
Description             Encumbrances       Land         Property       Acquisition
                       (in thousands)                                 (in thousands)
<S>                       <C>              <C>          <C>                <C>
Northsprings              $ 1,893          $  736       $ 4,196            $  21
Lakeside                    4,100           1,259         5,791             (244)
Bexley House                1,249             647         3,067              216
Covington Pointe            4,639           1,935         7,041            1,103

Totals                    $11,881         $ 4,577       $20,095          $ 1,096
</TABLE>

<TABLE>
<CAPTION>

                     Gross Amount At Which
                            Carried
                     At December 31, 1999
                        (in thousands)
                           Buildings
                          And Related
                           Personal            Accumulated      Date of     Date    Depreciable
   Description     Land    Property    Total   Depreciation  Construction Acquired  Life-Years
                                              (in thousands)
<S>                <C>      <C>       <C>        <C>             <C>        <C>        <C>
Northsprings       $  597   $ 4,356   $ 4,953    $ 2,550         1969       11/85      5-25
Lakeside            1,046     5,760     6,806      3,315         1980       05/86      5-25
Bexley House          542     3,388     3,930      1,913         1972       09/86      5-25
Covington Pointe    1,935     8,144    10,079      4,245         1982       03/87      5-25

Totals            $ 4,120   $21,648   $25,768    $12,023
</TABLE>

<PAGE>

Reconciliation of "Investment Properties and Accumulated Depreciation"

                                              Years Ended December 31,
                                                 1999          1998
                                                   (in thousands)
Real Estate
Balance at beginning of year                    $24,680       $24,287
  Property Improvements                           1,088           393
Balance at end of year                          $25,768       $24,680

Accumulated Depreciation
Balance at beginning of year                    $11,055       $10,149
  Additions charged to expense                      968           906
Balance at end of year                          $12,023       $11,055

The  aggregate  cost of the real  estate  for  Federal  income tax  purposes  at
December  31,  1999 and 1998,  is  approximately  $28,937,000  and  $27,867,000,
respectively. The accumulated depreciation taken for Federal income tax purposes
at December 31, 1999 and 1998, is  approximately  $11,662,000  and  $10,553,000,
respectively.

Note H - Commitments and Contingencies

The Partnership  Agreement provides for payment of a fee to the Managing General
Partner for managing the affairs of the  Partnership.  The fee is 2% of adjusted
cash from  operations,  as  defined  in the  partnership  agreement.  The fee is
payable only after the Partnership  has  distributed,  to all limited  partners,
adjusted  cash  from  operations  in any year  equal  to 10% of  their  adjusted
invested capital as defined in the partnership  agreement.  No fees were payable
for the years ended December 31, 1999 and 1998.

Note I - Distributions

The  Partnership  distributed  cash from  operations of  approximately  $275,000
(approximately $267,000 to the limited partners or $9.97 per limited partnership
unit)  during the year ended  December 31,  1999.  As of December 31, 1999,  the
Partnership  declared a distribution  of cash from  operations of  approximately
$380,000  (approximately  $368,000 to the limited partners or $13.75 per limited
partnership  unit).  This distribution was paid in January 2000. During the year
ended December 31, 1998, the  Partnership  distributed  cash from  operations of
approximately $400,000 (approximately $388,000 to the limited partners or $14.49
per limited partnership unit).

Note J - Segment Reporting

Description  of the types of products  and  services  from which the  reportable
segment derives its revenues:

The  Partnership  has  one  reportable  segment:   residential  properties.  The
Partnership's residential property segment consists of four apartment complexes,
one each in Georgia,  North Carolina,  Ohio, and Texas.  The  Partnership  rents
apartment units to tenants for terms that are typically twelve months or less.

Measurement of segment profit or loss:

The  Partnership  evaluates  performance  based on segment  profit (loss) before
depreciation.  The accounting policies of the reportable segment are the same as
those described in the summary of significant accounting policies.

Factors management used to identify the Partnership's reportable segment:

The  Partnership's  reportable  segment  consists of investment  properties that
offer similar products and services.  Although each of the investment properties
are  managed  separately,  they have been  aggregated  into one  segment as they
provide services with similar types of products and customers.

Segment information for the years 1999 and 1998 is shown in the tables below (in
thousands). The "Other" Column includes Partnership administration related items
and income and expense not allocated to the reportable segment.

                 1999                   Residential     Other      Totals

Rental income                             $ 4,691       $   --    $ 4,691
Other income                                  217           24        241
Interest expense                              992           --        992
Depreciation                                  968           --        968
General and administrative expense             --          233        233
Equity in income of joint venture              --           88         88
Segment income (loss)                         584         (121)       463
Total assets                               15,214        1,078     16,292
Capital expenditures for investment
  properties                                1,088           --      1,088



                 1998                   Residential    Other      Totals

Rental income                             $ 4,427       $  --     $ 4,427
Other income                                  187          23         210
Interest expense                            1,002          --       1,002
Depreciation                                  906          --         906
General and administrative expense             --         226         226
Equity in income of joint venture              --          83          83
Segment income (loss)                         156        (120)         36
Total assets                               14,949         874      15,823
Capital expenditures for investment
  properties                                  393          --         393

<PAGE>

Note K - Legal Proceedings

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial  Group,  Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs  named as defendants,  among others,
the  Partnership,  the Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging  the  acquisition  by Insignia  Financial  Group,  Inc.
("Insignia")  and  entities  which  were,  at one time,  affiliates  of Insignia
("Insignia  Affiliates") of interests in certain general partner entities,  past
tender offers by Insignia  Affiliates to acquire limited  partnership units, the
management of partnerships  by Insignia  Affiliates and the Insignia Merger (see
"Note B - Transfer  of  Control").  The  plaintiffs  seek  monetary  damages and
equitable relief, including judicial dissolution of the Partnership. On June 25,
1998,  the Managing  General  Partner  filed a motion  seeking  dismissal of the
action.  In lieu of  responding  to the  motion,  the  plaintiffs  have filed an
amended  complaint.  The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999.  Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed and
filed a  Stipulation  of  Settlement,  settling  claims,  subject to final court
approval, on behalf of the Partnership and all limited partners who own units as
of November 3, 1999.  Preliminary  approval of the  settlement  was  obtained on
November 3, 1999 from the Superior Court of the State of  California,  County of
San Mateo, at which time the Court set a final approval hearing for December 10,
1999.  Prior to the  December  10,  1999  hearing  the  Court  received  various
objections to the settlement,  including a challenge to the Court's  preliminary
approval based upon the alleged lack of authority of class  plaintiffs'  counsel
to enter the settlement.  On December 14, 1999, the Managing General Partner and
its affiliates terminated the proposed settlement. Certain plaintiffs have filed
a motion to  disqualify  some of the  plaintiffs'  counsel  in the  action.  The
Managing  General  Partner does not anticipate  that costs  associated with this
case will be material to the Partnership's overall operations.

The  Partnership is unaware of any other pending or outstanding  litigation that
is not of a routine nature arising in the ordinary course of business.

Note L - Change in Accounting Principle

Effective  January 1, 1999, the Partnership  changed its method of accounting to
capitalize the cost of exterior  painting and major landscaping on a prospective
basis.  The  Partnership  believes  that  this  accounting  principle  change is
preferable  because it provides a better  matching of expenses  with the related
benefit of the expenditures and it is consistent with industry  practice and the
policies of the Managing General  Partner.  The effect of the change in 1999 was
to increase net income by approximately  $257,000 ($9.31 per limited partnership
unit). The cumulative effect, had this change been applied to prior periods,  is
not material.  The accounting  principle  change will not have an effect on cash
flow,  funds available for  distribution or fees payable to the Managing General
Partner and affiliates.

<PAGE>

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

          None.

<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

The  Partnership  does not have any  directors  or  officers.  The  names of the
director and executive officers of Davidson  Diversified  Properties,  Inc. (the
"Managing  General  Partner"),  their  ages  and  the  nature  of all  positions
presently  held by them are set forth below.  There are no family  relationships
between or among any officers and directors.

      Name                 Age    Position

      Patrick J. Foye       42    Executive Vice President and Director

      Martha L. Long        40    Senior Vice President and Controller

Patrick J. Foye has been  Executive  Vice President and Director of the Managing
General  Partner  since October 1, 1998.  Mr. Foye has served as Executive  Vice
President  of AIMCO  since May 1998.  Prior to  joining  AIMCO,  Mr.  Foye was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to
1998 and was  Managing  Partner  of the  firm's  Brussels,  Budapest  and Moscow
offices from 1992  through  1994.  Mr. Foye is also Deputy  Chairman of the Long
Island  Power   Authority  and  serves  as  a  member  of  the  New  York  State
Privatization  Council.  He received a B.A. from Fordham College and a J.D. from
Fordham University Law School.

Martha L. Long has been Senior Vice  President  and  Controller  of the Managing
General  Partner and AIMCO since October 1998, as a result of the acquisition of
Insignia  Financial  Group,  Inc. From June 1994 until January 1997, she was the
Controller for Insignia, and was promoted to Senior Vice President - Finance and
Controller in January 1997,  retaining that title until October 1998.  From 1988
to June 1994,  Ms. Long was Senior Vice  President and  Controller for The First
Savings Bank, FSB in Greenville, South Carolina.

Based solely upon a review of Forms 3 and 4 and amendments  thereto furnished to
the Registrant  under Rule 16a-3(e) during the  Registrant's  most recent fiscal
year and Form 5 and amendments  thereto furnished to the Registrant with respect
to its most recent  fiscal year,  the  Registrant  is not aware of any director,
officer,  beneficial  owner of more than ten  percent  of the  units of  limited
partnership interest in the Registrant that failed to file on a timely basis, as
disclosed in the above Forms,  reports required by section 16(a) of the Exchange
Act during the most recent  fiscal year or prior fiscal years except as follows:
AIMCO Properties,  L.P. and its joint filers failed to timely file a Form 3 with
respect to its  acquisition  of Units and AIMCO and its joint  filers  failed to
timely file a Form 4 with respect to its acquisition of Units.

Item 10.    Executive Compensation

No  remuneration  was paid by the  Partnership to any officer or director of the
Managing General Partner during the year ended December 31, 1999.

<PAGE>

Item 11.    Security Ownership of Certain Beneficial Owners and Management

Except as noted below, no person or entity was known by the Registrant to be the
beneficial  owners  of more  than 5% of the  Limited  Partnership  Units  of the
Registrant as of December 31, 1999.

                                                             Percentage
                 Entity                   Number of Units     of Total

Insignia Properites LP (1)                     570.00           2.129%
  (an affiliate of AIMCO)
AIMCO Properties LP (2)                      5,310.50          19.833%
  (an affiliate of AIMCO)
Cooper River Properties (1)                  3,830.00          14.304%
  (an affiliate of AIMCO)

Hospital Corporation of America              3,000.00          11.204%
201 West Main Street
Louisville, KY 40202

(1)  Entity is indirectly  ultimately owned by AIMCO. Its business address is 55
     Beattie Place, Greenville, SC 29602.

(2)  Entity is indirectly  ultimately  controlled by AIMCO. Its business address
     is 2000 South Colorado Boulevard, Denver, CO 80222.

As of December 31, 1999, no director or officer of the Managing  General Partner
owns,  nor do the  directors  or  officers  as a whole,  own more than 1% of the
Registrant's  Units.  No such  director  or  officer  had any  right to  acquire
beneficial ownership of additional Units of the Registrant.

Item 12.    Certain Relationships and Related Transactions

The  Partnership  has no employees  and is  dependent  on the  Managing  General
Partner  and  its  affiliates  for  the  management  and  administration  of all
Partnership  activities.  The  Partnership  Agreement  provides  for payments to
affiliates for property  management  services and for  reimbursement  of certain
expenses  incurred by  affiliates  on behalf of the  Partnership.  The following
transactions  with the  Managing  General  Partner  and/or its  affiliates  were
incurred during each of the years ended December 31, 1999 and 1998:

                                                   1999         1998
                                                    (in thousands)
Property management fees                          $ 251        $ 235
Reimbursement for services of affiliates            110          133

During the years ended  December 31, 1999 and 1998,  affiliates  of the Managing
General  Partner were  entitled to receive 5% of gross  receipts from all of the
Partnership's  properties  as  compensation  for providing  property  management
services.  The Partnership  paid to such affiliates  approximately  $251,000 and
$235,000 for the years ended December 31, 1999 and 1998, respectively.

An  affiliate  of  the  Managing  General  Partner  received   reimbursement  of
accountable  administrative  expenses  amounting to  approximately  $110,000 and
$133,000 for the years ended December 31, 1999 and 1998, respectively.

On September 25, 1997, an affiliate of the Managing  General  Partner  purchased
Lehman  Brothers' Class "D" subordinated  bonds of SASCO,  1992, M1. These bonds
are  secured by 55  multi-family  apartment  mortgage  loan pairs held in Trust,
including Bexley House Apartments owned by the Partnership.

Several tender offers were made by various parties,  including affiliates of the
Managing General Partner,  during the years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 9,710.50
limited partnership units in the Partnership representing  approximately 36.266%
of the outstanding  units. It is possible that AIMCO or its affiliates will make
one  or  more  additional  offers  to  acquire  additional  limited  partnership
interests in the  Partnership for cash or in exchange for units in the operating
partnership of AIMCO.  Under the Partnership  Agreement,  unitholders  holding a
majority of the Units are  entitled to take action with  respect to a variety of
matters. When voting on matters, AIMCO would in all likelihood vote the Units it
acquired in a manner  favorable to the interest of the Managing  General Partner
because of their affiliation with the Managing General Partner.

Item 13.  Exhibits and Reports on Form 8-K

     (a)  Exhibits:

          Exhibit 18, Independent  Accountants'  Preferability Letter for Change
          in Accounting Principle, is filed as an exhibit to this report.

          Exhibit 27,  Financial Data  Schedule,  is filed as an exhibit to this
          report.

     (b)  Reports on Form 8-K filed in the fourth quarter of calendar year 1999:

          None.


<PAGE>


                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Exchange Act, the  Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                    DAVIDSON INCOME REAL ESTATE, L.P.


                                    By:   Davidson Diversified Properties, Inc.,
                                          Managing General Partner

                                    By:   /s/Patrick J. Foye
                                          Patrick J. Foye
                                          Executive Vice President

                                    By:   /s/Martha L. Long
                                          Martha L. Long
                                          Senior Vice President
                                          and Controller

                                    Date:


In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the Partnership and in the capacities and on the
dates indicated.

/s/Patrick J. Foye      Executive Vice President      Date:
Patrick J. Foye         and Director

/s/Martha L. Long       Senior Vice President         Date:
Martha L. Long          and Controller

<PAGE>

                         DAVIDSON INCOME REAL ESTATE, LP

                                  EXHIBIT INDEX

  Exhibit

     2    Agreement  and Plan of Merger,  dated as of  October  1, 1998,  by and
          between  AIMCO and IPT,  incorporated  by  reference to Exhibit 2.1 of
          IPT's Current Report on Form 8-Kdated October 1, 1998.

     3    Agreement  of Limited  Partnership  is  incorporated  by  reference to
          Exhibit A to the Prospectus of the  Registrant  dated July 26, 1985 as
          filed with the Commission pursuant to Rule 424(b) under the Act.

     3A   Amendment  to   Partnership   Agreement   dated  October  1,  1985  is
          incorporated  by  reference to Exhibit 3A to the  Registrant's  Annual
          Report on Form 10-K for the fiscal year ended December 31, 1987.

     4    Certificate   of  Limited   Partnership   dated   April  29,  1985  is
          incorporated   by   reference   to  Exhibit  4  to  the   Registrant's
          Registration Statement on Form S-11 dated May 7, 1985.

     4A   Certificate of Amendment to Certificate of Limited  Partnership  dated
          July 16, 1985 is  incorporated by reference to Exhibit 4B in Amendment
          No. 1 to Registration Statement No. 2-97539, dated July 24, 1985.

     10A  Agent's Agreement dated July 1, 1985 between the Registrant and Harvey
          Freeman & Sons,  Inc. is  incorporated  by reference to Exhibit 10B in
          Amendment No. 1 to Registration  Statement No. 2-97539, dated July 24,
          1985.

     10B  Agreement  among Agents dated July 1, 1985 by and among Harvey Freeman
          & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas,  Harvey Freeman
          & Sons,  Inc.  of  Florida,  Harvey  Freeman & Sons,  Inc. of Georgia,
          Harvey Freeman & Sons, Inc. of Indiana, Harvey Freeman & Sons, Inc. of
          Kentucky, Harvey Freeman & Sons, Inc. of Mississippi, Harvey Freeman &
          Sons, Inc. of North Carolina, Harvey Freeman & Sons, Inc. of Ohio, and
          Harvey Freeman & Sons,  Inc. of South  Carolina,  is  incorporated  by
          reference to Exhibit 10C in Amendment No. 1 to Registration  Statement
          No. 2-97539, dated July 24, 1985.

     10C  Acquisition  and  Disposition  Services  Agreement  dated July 1, 1985
          between the Registrant and Criswell Freeman Company is incorporated by
          reference to Exhibit 10D in Amendment No. 1 to Registration  Statement
          No. 2-97539 dated July 24, 1985.

     10D  Contract  for Sale of Real Estate for  Northsprings  Apartments  dated
          October 19, 1985 between James B. Miller,  Karina Miller, Dahlis Winn,
          Christine  Abrams,  and  William  Lichirie,  as  Tenants in Common and
          Tennessee  Trust Company is incorporated by reference to Exhibit 10(a)
          to the  Registrant's  Current  Report on Form 8-K dated  November  13,
          1985.


<PAGE>


     10E  Assignment  of  Contract  for  Sale of  Real  Estate  of  Northsprings
          Apartments dated November 12, 1985 between Tennessee Trust Company and
          the  Registrant is  incorporated  by reference to Exhibit 10(b) to the
          Registrant's Current Report on Form 8-K dated November 13, 1985.

     10F  Promissory  Note dated  February  14, 1969  executed  by Mt.  Pleasant
          Plaza, Inc., a Georgia corporation payable to The Fulton National Bank
          of Atlanta,  a corporation  having its principal  place of business in
          Fulton County, Georgia, is incorporated by reference to Exhibit 10G to
          the Registrant's  Annual Report on Form 10-K for the fiscal year ended
          December 31, 1985.

     10G  Agreement  dated December 24, 1969 between  Massachusetts  Mutual Life
          Insurance Company, a Massachusetts corporation and Mt. Pleasant Plaza,
          Inc.,  a  corporation  of the State of  Georgia,  is  incorporated  by
          reference  to Exhibit 10H to the  Registrant's  Annual  Report on Form
          10-K for the fiscal year ended December 31, 1985.

     10H  Purchase Agreement for Lakeside Apartments dated April 4, 1986 between
          Lakeside  Apartments Venture, a North Carolina general partnership and
          Tennessee Trust Company, a Tennessee  corporation,  is incorporated by
          reference to Exhibit 10(a) to the Registrant's  Current Report on Form
          8-K dated May 20, 1986.

     10I  Assignment  of Agreement  dated May 16, 1986 between  Tennessee  Trust
          Company, a Tennessee  corporation,  and the Registrant is incorporated
          by reference to Exhibit 10(b) to the  Registrant's  Current  Report on
          Form 8-K dated May 20, 1986.

     10J  Deed of Trust Note  dated June 13,  1989  executed  by the  Registrant
          payable to John Hancock  Variable Life Insurance  Company  relating to
          Lakeside Apartments.

     10K  Deed of Trust and  Security  Agreement  dated April 28,  1980  between
          Lakeside  Properties,  Ltd.,  a North  Carolina  limited  partnership,
          Gibson L. Smith,  Jr., Trustee and Continental  Illinois National bank
          and Trust Company of Chicago is  incorporated  by reference to Exhibit
          10(d) to the  Registrant's  Current  Report  on Form 8-K dated May 20,
          1986.

     10L  Contract  for Sale of Real Estate for The Bexley  House dated July 16,
          1986 between Bexley House,  Limited,  an Ohio limited  partnership and
          Tennessee  Trust Company is incorporated by reference to Exhibit 10(a)
          to the  Registrant's  Current  Report on Form 8-K dated  September 30,
          1986.

     10M  Reinstatement  and  Amendment  of Contract for Sale of Real Estate for
          The  Bexley  House  dated  September  4, 1986  between  Bexley  House,
          Limited,  an Ohio limited  partnership and Tennessee Trust Company,  a
          Tennessee  corporation,  is incorporated by reference to Exhibit 10(b)
          to the  Registrant's  Current  Report on Form 8-K dated  September 30,
          1986.


<PAGE>


     10N  Amendment  to  Reinstated  and Amended for Sale of Real Estate for The
          Bexley House dated  September 19, 1986 between Bexley House,  Limited,
          an Ohio limited  partnership and Tennessee Trust Company,  a Tennessee
          corporation,  is  incorporated  by reference  to Exhibit  10(c) to the
          Registrant's Current Report on Form 8-K dated September 30, 1986.

     10O  Assignment  of Contract  for Sale of Real Estate dated  September  30,
          1986  between   Tennessee   Trust   Company  and  the   Registrant  is
          incorporated by reference to Exhibit 10(d) to the Registrant's Current
          Report on Form 8-K dated September 30, 1986.

     10P  Limited  Warranty Deed dated  September 28, 1986 between Bexley House,
          Ltd., an Ohio limited  partnership  and the Registrant is incorporated
          by reference to Exhibit 10(e) to the  Registrant's  Current  Report on
          Form 8-K dated September 30, 1986.

     10Q  Contract for Sale of Real Estate for Covington Pointe Apartments dated
          January  20,  1987  between   F.G.M.C.   Investment   Corp.,  a  Texas
          corporation  Tennessee  Trust  Company,  a Tennessee  corporation,  is
          incorporated by reference to Exhibit 10(a) to the Registrant's Current
          Report on Form 8-K dated March 10, 1987.

     10R  Amendment to Contract for Purchase of Real Estate for Covington Pointe
          Apartments dated January 23, 1987 between F.G.M.C. Investment Corp., a
          Texas corporation Tennessee Trust Company, a Tennessee corporation, is
          incorporated by reference to Exhibit 10(b) to the Registrant's Current
          Report on Form 8-K dated March 10, 1987.

     10S  Assignment  of Contract  for  Purchase  of Real  Estate for  Covington
          Pointe  Apartments dated March 2, 1987 between Tennessee Trust Company
          and the  Registrant is  incorporated  by reference to Exhibit 10(c) to
          the Registrant's Current Report on Form 8-K dated March 10, 1987.

     10T  Contract  for  Purchase of Real  Estate for Phase I of Sterling  Crest
          Apartments  dated March 10, 1987 between  Sterling  Crest  Development
          Partners,  Ltd., a Georgia  limited  partnership,  and Tennessee Trust
          Company,  a Tennessee  corporation,  is  incorporated  by reference to
          Exhibit  10(d) to the  Registrant's  Current  Report on Form 8-K dated
          March 10, 1987.

     10U  Mortgage Note dated March 23, 1987 executed by the Registrant  payable
          to BANCOhio National Bank relating to The Bexley House is incorporated
          by reference to Exhibit a(1) to the  Registrant's  Quarterly Report on
          Form 10-Q for the quarter ended March 31, 1987.

     10V  Open-End  Mortgage,  Assignment of Rents and Security  Agreement dated
          March  23,  1987  executed  by the  Registrant  in favor  of  BANCOhio
          National  Bank  relating  to  The  Bexley  House  is  incorporated  by
          reference to Exhibit a(2) to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended March 31, 1987.


<PAGE>


     10W  Mortgage Note dated March 23, 1987 executed by the Registrant  payable
          to BANCOhio National Bank relating to The Bexley House is incorporated
          by reference to Exhibit a(3) to the  Registrant's  Quarterly Report on
          Form 10-Q for the quarter ended March 31, 1987.

     10X  Open-End  Mortgage,  Assignment of Rents and Security  Agreement dated
          March  23,  1987  executed  by the  Registrant  in favor  of  BANCOhio
          National  Bank  relating  to  The  Bexley  House  is  incorporated  by
          reference to Exhibit a(4) to the Registrant's Quarterly Report on Form
          10-Q for the quarter ended March 31, 1987.

     10Y  Sterling Crest Joint Venture Agreement dated June 29, 1987 between the
          Registrant  and Freeman  Georgia  Ventures,  Inc. is  incorporated  by
          reference to Exhibit 10(b) to the Registrant's  Current Report on Form
          8-K dated June 30, 1987.

     10Z  Assignment  of  Contract  for  Purchase  of Real Estate for Phase I of
          Sterling  Crest  Apartments  dated June 29,  1987 is  incorporated  by
          reference to Exhibit 10(c) to the Registrant's  Current Report on Form
          8-K dated June 30, 1987.

     10AA Warranty Deed dated June 30, 1987 between  Sterling Crest  Development
          Partners,  Ltd. and Sterling Crest Joint Venture,  is  incorporated by
          reference to Exhibit 10(d) to the Registrant's  Current Report on Form
          8-K dated June 30, 1987.

     10BB Sub-Management  Agreement dated June 30, 1987 between Harvey Freeman &
          Sons, Inc. and Sterling Property  Management  Company, is incorporated
          by reference to Exhibit 10(k) to the  Registrant's  Current  Report on
          Form 8-K dated June 30, 1987.

     10CC Property  Management  Agreement  dated June 30, 1987 between  Sterling
          Crest Joint Venture and Harvey Freeman & Sons,  Inc., is  incorporated
          by reference to Exhibit 10(l) to the  Registrant's  Current  Report on
          Form 8-K dated June 30, 1987.

     10DD Contract  for  Purchase of Real Estate for Phase II of Sterling  Crest
          Apartments  dated March 10, 1987 between  Sterling  Crest  Development
          Partners,   Ltd.  and  Tennessee  Trust  Company  is  incorporated  by
          reference to Exhibit 10(a) to the Registrant's  Report on Form 8 dated
          December 29, 1987.

     10EE Tri-Party  Agreement  dated May 22, 1987 among North Carolina  Federal
          Savings & Loan Association,  Sterling Crest Development Partners, Ltd.
          and Tennessee Trust Company relating to Sterling Crest Apartments,  is
          incorporated by reference to Exhibit 10(b) to the Registrant's  Report
          on Form 8 dated December 29, 1987.

     10FF Assignment  of Contract  for  Purchase  of Real  Estate and  Tri-Party
          Agreement  dated November 4, 1987 between  Tennessee Trust Company and
          Sterling Crest Joint Venture relating to Sterling Crest Apartments, is
          incorporated by reference to Exhibit 10(c) to the Registrant's  Report
          on Form 8 dated December 29, 1987.


<PAGE>


     10GG Amended and  Restated  Sterling  Crest  Joint  Venture  Joint  Venture
          Agreement  dated June 29, 1987 among the  Registrant,  Freeman Georgia
          Ventures,  Inc., and Freeman  Growth Plus,  L.P., is  incorporated  by
          reference to Exhibit 10(d) to the Registrant's  Report on Form 8 dated
          December 29, 1987.

     10HH Memorandum  of  Understanding   among  SEC  Realty  Corp.,   Tennessee
          Properties, L.P., Freeman Mortgage Corporation, J. Richard Freeman, W.
          Criswell Freeman, and Jacques-Miller Properties,  Inc. is incorporated
          by reference to Exhibit 10MM to the Registrant's Annual Report of Form
          10-K for the fiscal year ended December 31, 1988.

     10II Partnership  Administration  and Consultation  Agreement among Freeman
          Properties,  Inc.,  Freeman  Diversified  Properties,  Inc.,  residual
          Equities Limited, and Jacques-Miller Properties,  Inc. is incorporated
          by reference to Exhibit 10NN to the Registrant's Annual Report of Form
          10-K for the fiscal year ended December 31, 1988.

     10JJ Termination  Agreement,  dated December 31, 1991 among Jacques-Miller,
          Inc.,   Jacques-Miller   Property  Management,   Davidson  Diversified
          Properites, Inc., and Supar, Inc.

     10KK Assignment  of  Limited  Partnership  Interest  of  Freeman  Equities,
          Limited,   dated  December  31,  1991  between  Davidson   Diversified
          Properties, Inc. and Insignia Jacques-Miller, L.P.

     10LL Assignment of General Partner Interests of Freeman Equities,  Limited,
          dated December 31, 1991 between Davidson Diversified Properties,  Inc.
          and MAE GP Corporation.

     10MM Stock certificate,  dated December 31, 1991 showing ownership of 1,000
          shares of Davidson Diversified Properties, Inc. by MAE GP Corporation.

     10NN Contracts related to refinancing of debt:

     (a)  First Deeds of Trust and Security  Agreements  dated  October 28, 1992
          between  Bexley  House,  L.P.  and First  Commonwealth  Realty  Credit
          Corporation,   a  Virginia  Corporation,   securing  Bexley  House  is
          incorporated  by  reference  to Exhibit  10NN (a) to the  Registrant's
          Annual  Report on Form 10-KSB for the fiscal year ended  December  31,
          1992.

     (b)  Second Deeds of Trust and Security  Agreements  dated October 28, 1992
          between  Bexley  House,  L.P.  and First  Commonwealth  Realty  Credit
          Corporation,   a  Virginia  Corporation,   securing  Bexley  House  is
          incorporated  by  reference  to Exhibit  10NN (b) to the  Registrant's
          Annual  Report on Form 10-KSB for the fiscal year ended  December  31,
          1992.

     (c)  First  Assignments  of Leases and Rents dated October 28, 1992 between
          Bexley House, L.P. and First Commonwealth Realty Credit Corporation, a
          Virginia  Corporation,   securing  Bexley  House  is  incorporated  by
          reference to Exhibit 10NN (c) to the  Partnership's  Annual  Report on
          Form 10-KSB for the fiscal year ended December 31, 1992.

     (d)  Second  Assignments of Leases and Rents dated October 28, 1992 between
          Bexley House, L.P. and First Commonwealth Realty Credit Corporation, a
          Virginia  Corporation,   securing  Bexley  House  is  incorporated  by
          reference to Exhibit 10NN (d) to the  Partnership's  Annual  Report on
          Form 10-KSB for the fiscal year ended December 31, 1992.

     (e)  First  Deeds of Trust Notes dated  October  28,  1992  between  Bexley
          House, L.P. and First Commonwealth Realty Credit Corporation  relating
          to Bexley  House is  incorporated  by reference to Exhibit 10NN (e) to
          the  Partnership's  Annual  Report on Form  10-KSB for the fiscal year
          ended December 31, 1992.

     (f)  Second  Deeds of Trust Notes dated  October  28, 1992  between  Bexley
          House, L.P. and First Commonwealth Realty Credit Corporation  relating
          to Bexley  House is  incorporated  by reference to Exhibit 10NN (f) to
          the  Partnership's  Annual  Report on Form  10-KSB for the fiscal year
          ended December 31, 1992.

     10OO Contracts related to refinancing of debt:

     (a)  First Deeds of Trust and Security  Agreements dated September 30, 1993
          between Davidson IRE Associates,  L.P. and Lexington Mortgage Company,
          a  Virginia   Corporation,   securing   Northsprings   Apartments   is
          incorporated  by  reference  to Exhibit  10OO (a) to the  Registrant's
          Quarterly  Report on Form 10-QSB for the quarter  ended  September 30,
          1993.

     (b)  Second Deeds of Trust and Security Agreements dated September 30, 1993
          between Davidson IRE Associates,  L.P. and Lexington Mortgage Company,
          a  Virginia   Corporation,   securing   Northsprings   Apartments   is
          incorporated  by  reference  to Exhibit  10OO (b) to the  Registrant's
          Quarterly  Report on Form 10-QSB for the quarter  ended  September 30,
          1993.

     (c)  First Assignments of Leases and Rents dated September 30, 1993 between
          Davidson  IRE  Associates,  L.P. and  Lexington  Mortgage  Company,  a
          Virginia Corporation, securing Northsprings Apartments is incorporated
          by reference to Exhibit 10OO (c) to the Registrant's  Quarterly Report
          on Form 10-QSB for the quarter ended September 30, 1993.

     (d)  Second  Assignments  of Leases  and Rents  dated  September  30,  1993
          between Davidson IRE Associates,  L.P. and Lexington Mortgage Company,
          a  Virginia   Corporation,   securing   Northsprings   Apartments   is
          incorporated  by  reference  to Exhibit  10OO (d) to the  Registrant's
          Quarterly  Report on Form 10-QSB for the quarter  ended  September 30,
          1993.


<PAGE>


     (e)  First Deeds of Trust Notes dated  September 30, 1993 between  Davidson
          IRE  Associates,  L.P. and  Lexington  Mortgage  Company,  relating to
          Northsprings  Apartments is  incorporated by reference to Exhibit 10OO
          (e) to the  Registrant's  Quarterly  Report  on  Form  10-QSB  for the
          quarter ended September 30, 1993.

     (f)  Second Deeds of Trust Notes dated September 30, 1993 between  Davidson
          IRE  Associates,  L.P. and  Lexington  Mortgage  Company,  relating to
          Northsprings  Apartments is  incorporated by reference to Exhibit 10OO
          (f) to the  Registrant's  Quarterly  Report  on  Form  10-QSB  for the
          quarter ended September 30, 1993.

     10PP Contracts related to refinancing of debt:

     (a)  First Deeds of Trust and Security  Agreements dated September 30, 1993
          between Davidson IRE Associates,  L.P. and Lexington Mortgage Company,
          a  Virginia  Corporation,  securing  Covington  Pointe  Apartments  is
          incorporated  by  reference  to Exhibit  10PP (a) to the  Registrant's
          Quarterly  Report on Form 10-QSB for the quarter  ended  September 30,
          1993.

     (b)  Second Deeds of Trust and Security Agreements dated September 30, 1993
          between Davidson IRE Associates,  L.P. and Lexington Mortgage Company,
          a  Virginia  Corporation,  securing  Covington  Pointe  Apartments  is
          incorporated  by  reference  to Exhibit  10PP (b) to the  Registrant's
          Quarterly  Report on Form 10-QSB for the quarter  ended  September 30,
          1993.

     (c)  First Assignments of Leases and Rents dated September 30, 1993 between
          Davidson  IRE  Associates,  L.P. and  Lexington  Mortgage  Company,  a
          Virginia   Corporation,   securing   Covington  Pointe  Apartments  is
          incorporated  by  reference  to Exhibit  10PP (c) to the  Registrant's
          Quarterly  Report on Form 10-QSB for the quarter  ended  September 30,
          1993.

     (d)  Second  Assignments  of Leases  and Rents  dated  September  30,  1993
          between Davidson IRE Associates,  L.P. and Lexington Mortgage Company,
          a  Virginia  Corporation,  securing  Covington  Pointe  Apartments  is
          incorporated  by  reference  to Exhibit  10PP (d) to the  Registrant's
          Quarterly  Report on Form 10-QSB for the quarter  ended  September 30,
          1993.

     (e)  First Deeds of Trust Notes dated  September 30, 1993 between  Davidson
          IRE  Associates,  L.P. and  Lexington  Mortgage  Company,  relating to
          Covington  Pointe  Apartments is  incorporated by reference to Exhibit
          10PP (e) to the  Registrant's  Quarterly Report on Form 10-QSB for the
          quarter ended September 30, 1993.


<PAGE>


     (f)  Second Deeds of Trust Notes dated September 30, 1993 between  Davidson
          IRE  Associates,  L.P. and  Lexington  Mortgage  Company,  relating to
          Covington  Pointe  Apartments is  incorporated by reference to Exhibit
          10PP (f) to the  Registrant's  Quarterly Report on Form 10-QSB for the
          quarter ended September 30, 1993.

     (g)  Multifamily Note dated November 1, 1996,  between Davidson Income Real
          Estate, L.P. and Lehman Brothers Holdings,  Inc. d/b/a Lehman Capital,
          a Division of Lehman Brothers Holdings, Inc.

     10QQ Contracts related to refinancing of debt:

     (a)  Multifamily  Note dated July 1, 1996,  between  Davidson  Income  Real
          Estate,  L.P.,  a Delaware  limited  partnership  and Lehman  Brothers
          Holdings,  Inc. d/b/a Lehman  Capital,  a Division of Lehman  Brothers
          Holdings, Inc.

     (b)  Rider to Multifamily Note dated July 1, 1996,  between Davidson Income
          Real Estate,  L.P., a Delaware limited partnership and Lehman Brothers
          Holdings,  Inc. d/b/a Lehman  Capital,  A Division of Lehman  Brothers
          Holdings, Inc.

     16   Letter from the Registrant's former independent  accountant  regarding
          its  concurrence  with  the  statements  made  by  the  Registrant  is
          incorporated  by  reference  to the exhibit  filed with Form 8-K dated
          September 30, 1992.

     18   Independent Accountants' Preferability Letter for Change in Accounting
          Principle.

     27   Financial Data Schedule.

     99A  Agreement  of  Limited   Partnership   for  Davidson  IRE  GP  Limited
          Partnership between Davidson Diversified Properties, Inc. and Davidson
          Income  Real  Estate,  L.P.  entered  into on  September  15,  1993 is
          incorporated by reference to Exhibit 99A to the Registrant's Quarterly
          Report on Form 10-QSB for the quarter ended September 30, 1993.

     99B  Agreement of Limited  Partnership  for Davidson IRE  Associates,  L.P.
          between  Davidson IRE GP Limited  Partnership and Davidson Income Real
          Estate,  L.P.  is  incorporated  by  reference  to Exhibit  99B to the
          Registrant's  Quarterly  Report on Form 10-QSB for the  quarter  ended
          September 30, 1993.

     99C  Agreement  of  Limited  Partnership  for  Bexley  House  L.P.  between
          Davidson  Income GP  Limited  Partnership  and  Davidson  Income  Real
          Estate,  L.P.  entered  into on October  13, 1993 is  incorporated  by
          reference  to Exhibit 99C to the  Registrant's  Annual  Report on Form
          10-KSB for the fiscal year ended December 31, 1992.


<PAGE>
                                                                      Exhibit 18

February 7, 2000


Mr. Patrick J. Foye
Executive Vice President
Davidson Diversified Properties, Inc.
Managing General Partner of Davidson Income Real Estate, L.P.
55 Beattie Place
P.O. Box 1089
Greenville, South Carolina 29602

Dear Mr. Foye:

Note L of Notes to the Consolidated Financial Statements of Davidson Income Real
Estate,  L.P.  included in its Form 10-KSB for the year ended  December 31, 1999
describes a change in the method of accounting to capitalize  exterior  painting
and major landscaping,  which would have been expensed under the old policy. You
have advised us that you believe  that the change is to a  preferable  method in
your  circumstances  because it provides a better  matching of expenses with the
related benefit of the  expenditures  and is consistent with policies  currently
being used by your industry and conforms to the policies of the Managing General
Partner.

There are no authoritative criteria for determining a preferable method based on
the particular circumstances; however, we conclude that the change in the method
of accounting  for exterior  painting and major  landscaping is to an acceptable
alternative  method which,  based on your business  judgment to make this change
for the reasons cited above, is preferable in your circumstances.

                                                               Very truly yours,
                                                            /s/Ernst & Young LLP