|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            
|                                  
|Form 10-KSB                       

(Mark One)

[X]

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



|                                           
|-------------------------------------------
|For the fiscal year ended December 31, 2006



[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



|                                                    
|----------------------------------------------------
|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. YesX 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.  [X]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ]  No[X]



State issuer's revenues for its most recent fiscal year.  $3,904,000



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, 2006.  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











The matters discussed in this report contain certain forward-looking statements, including, without limitation, statements regarding future financial performance and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the terms of governmental regulations that affect the Registrant and interpretations of those regulations; the competitive environment in which the Registrant operates; financing risks, including the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; litigation, including costs associated with prosecuting and defending claims and any adverse outcomes, and possible environmental liabilities. Readers should carefully review the Registrant's financial statements and the notes thereto, as well as the risk factors described in the documents the Registrant files from time to time with the Securities and Exchange Commission.



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 Partnership 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"), a publicly traded real estate investment trust.  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 Partnership 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 four residential properties, one of which was sold in 2003, 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.



The Partnership 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 provides property management services at the Partnerships properties.



Risk Factors



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 that 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.



Laws benefiting disabled persons may result in the Partnership's incurrence of unanticipated expenses.  Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped.  These and other Federal, state and local laws may require modifications to the Partnership's properties, or restrict renovations of the properties.  Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although the Managing General Partner believes that the Partnership's properties are substantially in compliance with the present requirements, the Partnership may incur unanticipated expenses to comply with the ADA and the FHAA.



Both the income and expenses of operating the investment 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.



From time to time, the Federal Bureau of Investigation, or FBI, and the United States Department of Homeland Security issue alerts regarding potential terrorist threats involving apartment buildings. Threats of future terrorist attacks, such as those announced by the FBI and the Department of Homeland Security, could have a negative effect on rent and occupancy levels at the Partnerships properties. The effect that future terrorist activities or threats of such activities could have on the Partnerships operations is uncertain and unpredictable. If the Partnership were to incur a loss at a property as a result of an act of terrorism, the Partnership could lose all or a portion of the capital invested in the property, as well as the future revenue from the property.



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 "Item 6. Management's Discussion and Analysis or Plan of Operation" included in this Form 10-KSB.





Item 2.

Description of Properties



The following table sets forth the Partnership's investments in properties:



|                            |          |                          |          
|--------------------------- | -------- | ------------------------ | ---------
|                            | Date of  |                          |          
|Property                    | Purchase | Type of Ownership        | Use      
|                            |          |                          |          
|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 mortgage (1)       | 64 units 
|                            |          |                          |          
|Covington Pointe Apartments | 03/10/87 | Fee ownership subject to | Apartment
|Dallas, Texas               |          | first mortgage (1)       | 180 units
|                            |          |                          |          
|Brighton Crest Apartments   | Phase I  | Partnership 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 mortgage           |          



(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.



|                        |                |              |             |                |          
|----------------------- | -------------- | ------------ | ----------- | -------------- | ---------
|                        | Gross          |              |             |                |          
|                        | Carrying       | Accumulated  | Depreciable | Method of      | Federal  
|Property                | Value          | Depreciation | Life        | Depreciation   | Tax Basis
|                        | (in thousands) |              |             | (in thousands)
|                        |                |              |             |                |          
|Lakeside Apartments     | $ 8,814        | $ 5,643      | 5-30 yrs    | S/L            | $ 4,054  
|Bexley House Apartments | 5,542          | 2,769        | 5-30 yrs    | S/L            | 2,322    
|Covington Pointe        |                |              |             |                |          
|Apartments              | 11,329         | 7,072        | 5-30 yrs    | S/L            | 5,416    
|                        | $25,685        | $15,484      |             |                | $11,792  



See "Note A" to the consolidated financial statements included in "Item 7. Financial Statements" for a description of the Partnership's capitalization and depreciation policies.



Schedule of Property Indebtedness



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



|                            |                |           |           |          |               
|--------------------------- | -------------- | --------- | --------- | -------- | --------------
|                            | Principal      |           |           |          | Principal     
|                            | Balance At     | Stated    |           |          | Balance       
|                            | December 31,   | Interest  | Period    | Maturity | Due At        
|Property                    | 2006           | Rate      | Amortized | Date     | Maturity (3)  
|                            | (in thousands) |           |           |          | (in thousands)
|                            |                |           |           |          |               
|Lakeside Apartments         |                |           |           |          |               
|1st mortgage                | $ 2,649        | (1)       | 30 years  | 09/15/07 | $ 2,599       
|Bexley House Apartments     |                |           |           |          |               
|1st mortgage                | 2,029          | 7.32% (2) | 20 years  | 01/01/21 | --            
|Covington Pointe Apartments |                |           |           |          |               
|1st mortgage                | 5,269          | 3.81% (2) | 20 years  | 07/01/10 | 4,416         
|                            |                |           |           |          |               
|Total                       | $9,947         |           |           |          | $7,015        



(1)

Adjustable rate based on the Fannie Mae discounted mortgage-backed security index plus 85 basis points through May 2006 and 105 basis points effective June 2006. The rate at December 31, 2006 was 6.30%.



(2)

Fixed rate mortgage.



(3)

See "Note C" of the consolidated financial statements in "Item 7. Financial Statements" for information with respect to the Partnership's ability to prepay these loans and other details about the loans.



Schedule of Rental Rates and Occupancy



Average annual rental rates and occupancy for 2006 and 2005 for each property were:



|                                |                |           |      |     
|------------------------------- | -------------- | --------- | ---- | ----
|                                | Average Annual | Average  
|                                | Rental Rates   | Occupancy
|                                | (per Unit)     |           |     
|Property                        | 2006           | 2005      | 2006 | 2005
|Lakeside Apartments             | $ 6,112        | $ 5,800   | 92%  | 91% 
|Bexley House Apartments (1)     | 11,602         | 12,362    | 90%  | 84% 
|Covington Pointe Apartments (2) | 8,889          | 8,727     | 98%  | 94% 



(1)

The Managing General Partner attributes the increase in occupancy at Bexley
House Apartments to increases in concessions offered and also to a new pricing structure, which is more competitive in the local market.



(2)

The Managing General Partner attributes the increase in occupancy of Covington Pointe Apartments to a new pricing structure, which is more competitive in the local market.



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 2006 for each property were:



|                            |                |      
|--------------------------- | -------------- | -----
|                            | 2006           | 2006 
|                            | Billings       | Rates
|                            | (in thousands) |      
|Lakeside Apartments         | $  77          | 1.43%
|Bexley House Apartments     | 128            | 9.14%
|Covington Pointe Apartments | 187            | 2.79%



Capital Improvements



Lakeside Apartments



During the year ended December 31, 2006, the Partnership completed approximately $203,000 of capital improvements at Lakeside Apartments, consisting primarily of countertop resurfacing, sewer and water upgrades, roof replacements, fencing, swimming pool decking and floor covering and appliance replacements. These improvements were funded from operating cash flow. The Partnership regularly evaluates the capital improvement needs of the property. While the Partnership has no material commitments for property improvements and replacements, certain routine capital expenditures are anticipated during 2007. Such capital expenditures will depend on the physical condition of the property as well as anticipated cash flow generated by the property.



Bexley House Apartments



During the year ended December 31, 2006, the Partnership completed approximately $394,000 of capital improvements at Bexley House Apartments, consisting primarily of casualty repairs related to the December 2005 fire and floor covering and appliance replacements. Included in these costs are capitalized construction period interest, taxes and operating costs of approximately $15,000, $10,000 and $3,000, respectively. These improvements were funded from operating cash flow, insurance proceeds and advances from an affiliate of the Managing General Partner. The Partnership regularly evaluates the capital improvement needs of the property. While the Partnership has no material commitments for property improvements and replacements, certain routine capital expenditures are anticipated during 2007. Such capital expenditures will depend on the physical condition of the property as well as anticipated cash flow generated by the property.



Covington Pointe Apartments



During the year ended December 31, 2006, the Partnership completed approximately $261,000 of capital improvements at Covington Pointe Apartments, consisting primarily of countertop resurfacing, structural upgrades, heating and air conditioning upgrades, and appliance and floor covering replacements. These improvements were funded from operating cash flow and advances from an affiliate of the Managing General Partner. The Partnership regularly evaluates the capital improvement needs of the property. While the Partnership has no material commitments for property improvements and replacements, certain routine capital expenditures are anticipated during 2007. Such capital expenditures will depend on the physical condition of the property as well as anticipated cash flow generated by the property.



Additional capital expenditures will be incurred only if cash is available from operations, Partnership reserves, or advances from affiliates of the Managing General Partner. To the extent that capital improvements are completed, the Partnerships distributable cash flow, if any, may be adversely affected at least in the short term.



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. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action purported to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) that are named as nominal defendants, challenging, among other things, the acquisition of interests in certain Managing General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities that were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs sought monetary damages and equitable relief, including judicial dissolution of the Partnership. In addition, during the third quarter of 2001, a complaint captioned Heller v. Insignia Financial Group (the "Heller action") was filed against the same defendants that are named in the Nuanes action. On or about August 6, 2001, plaintiffs filed a first amended complaint. The Heller action was brought as a purported derivative action, and asserted claims for, among other things, breach of fiduciary duty, unfair competition, conversion, unjust enrichment, and judicial dissolution. On January 28, 2002, the trial court granted defendants motion to strike the complaint.  Plaintiffs took an appeal from this order.



On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action. On June 13, 2003, the court granted final approval of the settlement and entered judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector ("Objector") filed an appeal (the Appeal) seeking to vacate and/or reverse the order approving the settlement and entering judgment thereto. On May 4, 2004, the Objector filed a second appeal challenging the courts use of a referee and its order requiring Objector to pay those fees.



On March 21, 2005, the Court of Appeals issued opinions in both pending appeals.  With regard to the settlement and judgment entered thereto, the Court of Appeals vacated the trial courts order and remanded to the trial court for further findings on the basis that the state of the record is insufficient to permit meaningful appellate review.  The matter was transferred back to the trial court on June 21, 2005.  With regard to the second appeal, the Court of Appeals reversed the order requiring the Objector to pay referee fees. With respect to the related Heller appeal, on July 28, 2005, the Court of Appeals reversed the trial courts order striking the first amended complaint.



On August 18, 2005, Objector and his counsel filed a motion to disqualify the trial court based on a peremptory challenge and filed a motion to disqualify for cause on October 17, 2005, both of which were ultimately denied and/or struck by the trial court.  On or about October 13, 2005 Objector filed a motion to intervene and on or about October 19, 2005 filed both a motion to take discovery relating to the adequacy of plaintiffs as derivative representatives and a motion to dissolve the anti-suit injunction in connection with settlement.  On November 14, 2005, Plaintiffs filed a Motion For Further Findings pursuant to the remand ordered by the Court of Appeals. Defendants joined in that motion.  On February 3, 2006, the Court held a hearing on the various matters pending before it and ordered additional briefing from the parties and Objector. On June 30, 2006, the trial court entered an order confirming its approval of the class action settlement and entering judgment thereto after the Court of Appeals had remanded the matter for further findings.  The substantive terms of the settlement agreement remain unchanged.  The trial court also entered supplemental orders on July 1, 2006, denying Objectors Motion to File a Complaint in Intervention, Objectors Motion for Leave of Discovery and Objectors Motion to Dissolve the Anti-Suit Injunction.  Notice of Entry of Judgment was served on July 10, 2006. On August 31, 2006, the Objector filed a Notice of Appeal to the Courts June 30, 2006 and July 1, 2006 orders. On December 14, 2006, Objector filed his Appellants Brief.  The Partnership and its affiliates, as well as counsel of the Settlement Class, have not yet filed their briefs in response.



The Managing General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnerships overall operations.



AIMCO Properties, L.P. and NHP Management Company, both affiliates of the Managing General Partner, are defendants in a lawsuit alleging that they willfully violated the Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime for all hours worked in excess of forty per week. The complaint, filed in the United States District Court for the District of Columbia, attempts to bring a collective action under the FLSA and seeks to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties, L.P. and NHP Management Company failed to compensate maintenance workers for time that they were required to be "on-call." Additionally, the complaint alleges AIMCO Properties, L.P. and NHP Management Company failed to comply with the FLSA in compensating maintenance workers for time that they worked in excess of 40 hours in a week.   In June 2005 the court conditionally certified the collective action on both the on-call and overtime issues.  Approximately 1,049 individuals opted in to the class. On March 28, 2007, the court issued an opinion decertifying the collective action on both issues.  The court held that the members of the collective action are not similarly situated and the case may not proceed as a collective action.  The nine named plaintiffs still maintain their individual causes of action. The California and Maryland cases are still pending as they were stayed pending the outcome of the decertification motion in the District of Columbia case.  Although the outcome of any litigation is uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome will have a material adverse effect on its consolidated financial condition or results of operations. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnerships consolidated financial condition or results of operations.



Item 4.

Submission of Matters to a Vote of Security Holders



During the quarter ended December 31, 2006, 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s Equity and Related Partner Matters



The Partnership, a publicly held limited partnership, sold 26,776 limited partnership units (the "Units") aggregating $26,776,000 during its offering period. As of December 31, 2006, there are 1,391 holders of record owning an aggregate of 26,776 Units.  Affiliates of the Managing General Partner owned 13,189.50 Units or 49.26% of the outstanding Units as of December 31, 2006.  No public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future.



There were no distributions during the years ended December 31, 2006 and 2005. Future cash distributions will depend on the levels of cash generated from operations and the timing of debt maturities, refinancings, and/or property sales.  The Partnerships cash available for distribution is reviewed on a monthly basis. In light of the amounts accrued and payable to affiliates of the Managing General Partner at December 31, 2006 there can be no assurance that the Partnership will generate sufficient funds from operations, after required capital expenditures to permit any distributions to its partners in 2007 or subsequent periods.  See Item 2. Description of Properties  Capital Improvements for information relating to anticipated capital expenditures at the properties.



In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 13,189.50 Units in the Partnership representing 49.26% of the outstanding Units at December 31, 2006.  A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers.  Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.26% of the outstanding Units, AIMCO and its affiliates are in a position to influence all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder.



Item 6.

Management's Discussion and Analysis or Plan of Operation



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



The Partnerships financial results depend upon a number of factors including the ability to attract and maintain tenants at the investment properties, interest rates on mortgage loans, costs incurred to operate the investment properties, general economic conditions and weather. 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, the Managing General Partner may use rental concessions and rental rate reductions to offset softening market conditions, accordingly, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Further, a number of factors that are outside the control of the Partnership such as the local economic climate and weather can adversely or positively affect the Partnerships financial results.



Results of Operations



The Partnership had a net loss of approximately $683,000 and $817,000 for the years ended December 31, 2006 and 2005, respectively.  The decrease in net loss is due to an increase in total revenues and a decrease in equity in loss of joint venture partially offset by an increase in total expenses.



Total revenues increased for the year ended December 31, 2006 due to increases in both rental and other income and the recognition of a casualty gain.  Rental income increased due to an increase in the average rental rate at both Covington Pointe Apartments and Lakeside Apartments and an increase in occupancy at all three investment properties partially offset by a decrease in the average rental rate at Bexley House Apartments.  Other income increased due to an increase in utility reimbursements at all three investment properties.



In December 2005, Bexley House Apartments suffered fire damage to two of its rental units.  Insurance proceeds of approximately $224,000 were received during the year ended December 31, 2006.  The Partnership recognized a casualty gain of approximately $191,000 for the year ended December 31, 2006 as a result of the receipt of approximately $224,000 in insurance proceeds net of the write-off of the undepreciated damaged assets of approximately $33,000.



The increase in total expenses is primarily due to increases in operating, depreciation, interest, and property tax expenses partially offset by a decrease in general and administrative expense.  The increase in operating expense is due to increases in property, administrative and insurance expenses partially offset by a decrease in maintenance expense.  Property expense increased due to an increase in maintenance salaries at Lakeside Apartments and utility costs at Bexley House Apartments.  Administrative expense increased due to the increase in training/travel and legal fees at all three investment properties.  Insurance expense increased due to an increase in hazard insurance premiums at all three investment properties. Maintenance expense decreased due to a decrease in turnover costs associated with getting apartment units available for rental and a decrease in contract services at Covington Pointe Apartments. Depreciation expense increased due to an increase in assets placed into service at all three investment properties.  Interest expense increased due to an increase in interest on advances from an affiliate of the Managing General Partner as a result of an increase in advances and an increase in the variable interest rate charged on such advances. Interest expense also increased due to an increase in the variable interest rate charged on the mortgage encumbering Lakeside Apartments.  Property taxes increased due to the receipt of a refund during 2005 for Lakeside Apartments from the successful appeals of prior year taxes partially offset by the capitalization of construction period property taxes during 2006 related to the fire damage at Bexley House Apartments.



General and administrative expenses decreased due to a decrease in management reimbursements to the Managing General Partner as allowed under the Partnership Agreement.  Also included in general and administrative expenses are costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement.



The Partnership owns a 17.5% interest in Sterling Crest Joint Venture (the Joint Venture). The Partnership recognized equity in loss of the joint venture of approximately $56,000 for the year ended December 31, 2006 compared to approximately $65,000 for the year ended December 31, 2005.



Liquidity and Capital Resources



At December 31, 2006 the Partnership had cash and cash equivalents of approximately $279,000 compared to approximately $201,000 at December 31, 2005.  Cash and cash equivalents increased approximately $78,000 since December 31, 2005 due to approximately $666,000 and $46,000 of cash provided by operating and financing, respectively, partially offset by approximately $634,000 of cash used in investing activities.  Cash used in investing activities consisted of property improvements and replacements partially offset by net withdrawals from restricted escrows maintained by the mortgage lender and the receipt of insurance proceeds.  Cash provided by financing activities consisted of advances received from an affiliate of the Managing General Partner partially offset by payments of principal on the mortgages encumbering the Partnerships investment properties.  The Partnership invests its working capital reserves in interest bearing 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 investment 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 Managing General Partner monitors developments in the area of legal and regulatory compliance.  For example, the Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas.  In light of these changes, the Partnership expects that it will incur higher expenses related to compliance.  The Partnership regularly evaluates the capital improvement needs of the properties. While the Partnership has no material commitments for property improvements and replacements, certain routine capital expenditures are anticipated during 2007.  Such capital expenditures will depend on the physical condition of the properties as well as anticipated cash flow generated by the properties.  Capital expenditures will be incurred only if cash is available from operations or from Partnership reserves and advances from affiliates of the Managing General Partner.  To the extent that 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 assets are thought to be generally sufficient for any near-term needs (exclusive of capital improvements) of the Partnership. The mortgage indebtedness encumbering the Partnership's investment properties of approximately $9,947,000 is amortized over varying periods, with balloon payments of approximately $2,599,000 due in September 2007 for Lakeside Apartments and approximately $4,416,000 due in July 2010 for Covington Pointe Apartments. The debt encumbering Bexley House Apartments matures in January 2021 at which time the loan is scheduled to be fully amortized. 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 may risk losing such properties through foreclosure.



There were no distributions during the years ending December 31, 2006 and 2005. Future cash distributions will depend on the levels of cash generated from operations and the timing of debt maturities, refinancings, and/or property sales.  The Partnerships cash available for distribution is reviewed on a monthly basis. In light of the amounts accrued and payable to affiliates of the Managing General Partner at December 31, 2006 there can be no assurance that the Partnership will generate sufficient funds from operations, after required capital improvements to permit any distributions to its partners during 2007 or subsequent periods.



In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 13,189.50 limited partnership units (the "Units") in the Partnership representing 49.26% of the outstanding Units at December 31, 2006.  A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers.  Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.26% of the outstanding Units, AIMCO and its affiliates are in a position to influence all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder.



Critical Accounting Policies and Estimates



A summary of the Partnerships significant accounting policies is included in "Note A  Organization and Summary of Significant Accounting Policies" which is included in the consolidated financial statements in "Item 7. Financial Statements".  The Managing General Partner believes that the consistent application of these policies enables the Partnership to provide readers of the consolidated financial statements with useful and reliable information about the Partnerships operating results and financial condition.  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Judgments and assessments of uncertainties are required in applying the Partnerships accounting policies in many areas.  The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.



Impairment of Long-Lived Assets



Investment properties are recorded at cost, less accumulated depreciation, unless the carrying amount of the asset is not recoverable.  If events or circumstances indicate that the carrying amount of a property may not be recoverable, the Partnership will make an assessment of its recoverability by comparing the carrying amount to the Partnerships estimate of the undiscounted future cash flows, excluding interest charges, of the property.   If the carrying amount exceeds the aggregate undiscounted future cash flows, the Partnership would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.



Real property investment is subject to varying degrees of risk.  Several factors may adversely affect the economic performance and value of the Partnerships investment properties.  These factors include, but are not limited to, general economic climate; competition from other apartment communities and other housing options; local conditions, such as loss of jobs or an increase in the supply of apartments that might adversely affect apartment occupancy or rental rates; changes in governmental regulations and the related cost of compliance; increases in operating costs (including real estate taxes) due to inflation and other factors, which may not be offset by increased rents; and changes in tax laws and housing laws, including the enactment of rent control laws or other laws regulating multi-family housing.  Any adverse changes in these factors could cause impairment of the Partnerships assets.



Revenue Recognition



The Partnership generally leases apartment units for twelve-month terms or less.  The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Rental income attributable to leases, net of any concessions, is recognized on a straight-line basis over the term of the lease.  The Partnership evaluates all accounts receivable from residents and establishes an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants.



Capitalized Costs Related to Redevelopment and Construction Projects



The Partnership capitalizes costs incurred in connection with capital expenditure activities, including redevelopment and construction projects. Costs including interest, property taxes and operating costs associated with redevelopment and construction projects are capitalized in accordance with Statement of Financial Accounting Standard (SFAS) No. 34 Capitalization of Interest Costs and SFAS No. 67, Accounting for Costs and the Initial Rental Operations of Real Estate Properties. Included in these capitalized costs are payroll costs associated with time spent by site employees in connection with the planning, execution and control of all capital expenditure activities at the property level.





Item 7.

Financial Statements



DAVIDSON INCOME REAL ESTATE, L.P.



LIST OF CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm



Consolidated Balance Sheet - December 31, 2006



Consolidated Statements of Operations - Years ended December 31, 2006 and 2005



Consolidated Statements of Changes in Partners' Deficit - Years ended December 31, 2006 and 2005



Consolidated Statements of Cash Flows - Years ended December 31, 2006 and 2005



Notes to Consolidated Financial Statements











Report of Independent Registered Public Accounting Firm







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, 2006, and the related consolidated statements of operations, changes in partners' deficit, and cash flows for each of the two years in the period ended December 31, 2006.  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 the standards of the Public Company Accounting Oversight Board (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.  We were not engaged to perform an audit of the Partnerships internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnerships internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2006, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.





/s/ERNST & YOUNG LLP







Greenville, South Carolina

March 29, 2007



















|                                 
|---------------------------------
|DAVIDSON INCOME REAL ESTATE, L.P.
|                                 
|CONSOLIDATED BALANCE SHEET       
|(in thousands, except unit data) 
|                                 
|December 31, 2006                





|                                          |           |         
|----------------------------------------- | --------- | --------
|Assets                                    |           |         
|Cash and cash equivalents                 |           | $    279
|Receivables and deposits                  |           | 144     
|Restricted escrow                         |           | 6       
|Other assets                              |           | 210     
|Investment properties (Notes C and G):    |           |         
|Land                                      | $  3,523  |         
|Buildings and related personal property   | 22,162    |         
|                                          | 25,685    |         
|Less accumulated depreciation             | (15,484)  | 10,201  
|                                          |           | $10,840 
|Liabilities and Partners' Deficit         |           |         
|Liabilities                               |           |         
|Accounts payable                          |           | $     70
|Tenant security deposit liabilities       |           | 74      
|Accrued property taxes                    |           | 315     
|Other liabilities                         |           | 151     
|Due to affiliates (Note F)                |           | 3,386   
|Mortgage notes payable (Note C)           |           | 9,947   
|Deficit in joint venture (Note B)         |           | 987     
|                                          |           |         
|Partners' Deficit                         |           |         
|General partners                          | $   (895) |         
|Limited partners (26,776 units issued and |           |         
|outstanding)                              | (3,195)   | (4,090) 
|                                          |           | $10,840 



See Accompanying Notes to Consolidated Financial Statements





|                                     
|-------------------------------------
|DAVIDSON INCOME REAL ESTATE, L.P.    
|                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS
|(in thousands, except per unit data) 





|                                             |                          |          
|-------------------------------------------- | ------------------------ | ---------
|                                             |                         
|                                             | Years Ended December 31,
|                                             | 2006                     | 2005     
|Revenues:                                    |                          |          
|Rental income                                | $  3,399                 | $  3,233 
|Other income                                 | 314                      | 281      
|Casualty gain (Note D)                       | 191                      | --       
|Total revenues                               | 3,904                    | 3,514    
|                                             |                          |          
|Expenses:                                    |                          |          
|Operating                                    | 2,006                    | 1,957    
|General and administrative                   | 177                      | 193      
|Depreciation                                 | 1,136                    | 1,066    
|Interest                                     | 829                      | 681      
|Property taxes                               | 383                      | 369      
|Total expenses                               | 4,531                    | 4,266    
|                                             |                          |          
|Loss before equity in loss of joint venture  | (627)                    | (752)    
|Equity in loss of joint venture (Note B)     | (56)                     | (65)     
|                                             |                          |          
|Net loss (Note E)                            | $(683)                   | $(817)   
|                                             |                          |          
|Net loss allocated to general partners (3%)  | $    (20)                | $    (25)
|                                             |                          |          
|Net loss allocated to limited partners (97%) | (663)                    | (792)    
|                                             |                          |          
|                                             | $(683)                   | $(817)   
|                                             |                          |          
|Net loss per limited partnership unit        | $(24.76)                 | $(29.58) 



See Accompanying Notes to Consolidated Financial Statements















|                                                       
|-------------------------------------------------------
|DAVIDSON INCOME REAL ESTATE, L.P.                      
|                                                       
|CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
|(in thousands, except unit data)                       







|                               |             |          |          |         
|------------------------------ | ----------- | -------- | -------- | --------
|                               | Limited     |          |          |         
|                               | Partnership | General  | Limited  |         
|                               | Units       | Partners | Partners | Total   
|                               |             |          |          |         
|Original capital contributions | 26,776      | $1       | $26,776  | $26,777 
|                               |             |          |          |         
|Partners' deficit at           |             |          |          |         
|December 31, 2004              | 26,776      | $  (850) | $(1,740) | $(2,590)
|                               |             |          |          |         
|Net loss for the year ended    |             |          |          |         
|December 31, 2005              | --          | (25)     | (792)    | (817)   
|                               |             |          |          |         
|Partners' deficit at           |             |          |          |         
|December 31, 2005              | 26,776      | (875)    | (2,532)  | (3,407) 
|                               |             |          |          |         
|Net loss for the year ended    |             |          |          |         
|December 31, 2006              | --          | (20)     | (663)    | (683)   
|                               |             |          |          |         
|Partners' deficit at           |             |          |          |         
|December 31, 2006              | 26,776      | $(895)   | $(3,195) | $(4,090)



See Accompanying Notes to Consolidated Financial Statements

















|                                     
|-------------------------------------
|DAVIDSON INCOME REAL ESTATE, L.P.    
|                                     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|(in thousands)                       



|                                                     |                          |         
|---------------------------------------------------- | ------------------------ | --------
|                                                     | Years Ended December 31,
|                                                     | 2006                     | 2005    
|Cash flows from operating activities:                |                          |         
|Net loss                                             | $  (683)                 | $  (817)
|Adjustments to reconcile net loss to net cash        |                          |         
|provided by operating activities:                    |                          |         
|Casualty gain                                        | (191)                    | --      
|Depreciation                                         | 1,136                    | 1,066   
|Amortization of loan costs                           | 36                       | 36      
|Equity in loss of joint venture                      | 56                       | 65      
|Change in accounts:                                  |                          |         
|Receivables and deposits                             | 6                        | 14      
|Other assets                                         | 5                        | 7       
|Accounts payable                                     | (21)                     | (4)     
|Tenant security deposit liabilities                  | 9                        | (9)     
|Accrued property taxes                               | (10)                     | (42)    
|Other liabilities                                    | (4)                      | (12)    
|Due to affiliates                                    | 327                      | 161     
|Net cash provided by operating activities            | 666                      | 465     
|                                                     |                          |         
|Cash flows from investing activities:                |                          |         
|Property improvements and replacements               | (873)                    | (1,350) 
|Net withdrawals from restricted escrows              | 15                       | 69      
|Insurance proceeds from casualty                     | 224                      | --      
|Net cash used in investing activities                | (634)                    | (1,281) 
|                                                     |                          |         
|Cash flows from financing activities:                |                          |         
|Payments on mortgage notes payable                   | (378)                    | (363)   
|Advances from affiliates                             | 424                      | 1,058   
|Net cash provided by financing activities            | 46                       | 695     
|                                                     |                          |         
|Net increase (decrease) in cash and cash equivalents | 78                       | (121)   
|Cash and cash equivalents at beginning of year       | 201                      | 322     
|                                                     |                          |         
|Cash and cash equivalents at end of year             | $279                     | $201    
|                                                     |                          |         
|Supplemental disclosure of cash flow information:    |                          |         
|Cash paid for interest, net of capitalized interest  | $511                     | $479    
|                                                     |                          |         
|Supplemental disclosure of non-cash activity:        |                          |         
|Property improvements and replacements in accounts   |                          |         
|payable                                              | $6                       | $21     





See Accompanying Notes to Consolidated Financial Statements

















|                                          
|------------------------------------------
|DAVIDSON INCOME REAL ESTATE, L.P.         
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|December 31, 2006                         





Note A - Organization and Summary of 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 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 Partnership owns and operates three apartment properties located in the Midwest, South and Southeast and owns a joint venture interest in an entity which owns one residential property which is located in the South.  The Managing General Partner is a subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. 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 consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.



Allocations to Partners



Net loss of the Partnership and taxable 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 the 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.



Investment Properties



Investment properties consist of three apartment complexes and are stated at cost.  The Partnership capitalizes costs incurred in connection with capital expenditure activities, including redevelopment and construction projects, other tangible property improvements and replacements of existing property components.  Costs including interest, property taxes and operating costs associated with redevelopment and construction projects are capitalized during periods in which redevelopment and construction projects are in progress in accordance with Statement of Financial Standards (SFAS) No. 34 Capitalization of Interest Costs and SFAS No. 67, Accounting for Costs and the Initial Rental Operations of Real Estate Properties.  Costs incurred in connection with capital projects are capitalized where the costs of the project exceed $250.  Included in these capitalized costs are payroll costs associated with time spent by site employees in connection with the planning, execution and control of all capital expenditure activities at the property level.  The Partnership capitalized approximately $15,000, $10,000, and $3,000 of construction period interest, property taxes and operating costs during the year ended December 31, 2006. The Partnership did not capitalize any costs related to interest, property taxes or operating costs during the year ended December 31, 2005. Capitalized costs are depreciated over the useful life of the asset.  Expenditures for ordinary repairs, maintenance and apartment turnover costs are expensed as incurred.



In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate 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 necessary for the years ending December 31, 2006 and 2005.



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 for real property over 19 years for additions after May 8, 1985, and before 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.



Cash and Cash Equivalents



Cash and cash equivalents include cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $248,000 at December 31, 2006 that are maintained by an affiliated management company on behalf of affiliated entities in cash concentration accounts.



Tenant Security Deposits



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



Deferred Costs



Loan costs of approximately $236,000, less accumulated amortization of approximately $126,000, are included in other assets.  The loan costs are being amortized over the terms of the related loan agreements.  Amortization expense of approximately $36,000 for both the years ended December 31, 2006 and 2005 is included in interest expense.  Amortization expense is expected to be approximately $32,000 for the year 2007, $20,000 for each of the years 2008 and 2009, $13,000 for the year 2010 and approximately $3,000 for the year 2011.



Leasing commissions and other direct costs incurred in connection with successful leasing efforts are deferred and amortized over the terms of the related leases.  Amortization of these costs is included in operating expenses.



Leases



The Partnership generally leases apartment units for twelve-month terms or less.  The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Rental income attributable to leases, net of any concessions, is recognized on a straight-line basis over the term of the lease.  The Partnership evaluates all accounts receivable from residents and establishes an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants.



Joint Venture



The Partnership accounts for its investment in the Sterling Crest Joint Venture using the equity method of accounting (see "Note B" 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.  SFAS No. 131 also established standards for related disclosures about products and services, geographic areas, and major customers. As defined in SFAS No. 131, the Partnership has only one reportable segment.



Advertising



The Partnership expenses the costs of advertising as incurred. Advertising expense, included in operating expenses, was approximately $105,000 and $107,000 for the years ended December 31, 2006 and 2005, respectively.



Fair Value of Financial Instruments



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 including the mortgage encumbering Lakeside Apartments. The Partnership estimates the fair value of its long-term debt by discounting future cash flows using a discount rate commensurate with that currently believed to be available to the Partnership for similar term long term debt. The fair value of the Partnership's long term debt at the Partnerships incremental borrowing rate approximates its carrying value.



Recent Accounting Pronouncements



In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154 Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 and SFAS No. 3, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, although early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS No. 154 was issued. The Partnership adopted SFAS No. 154 effective January 1, 2006. The adoption of SFAS No. 154 did not have a material effect on the Partnerships consolidated financial condition or results of operations.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS No. 157 establishes a hierarchy that prioritizes the information used in developing fair value estimates. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entitys own data. SFAS No. 157 requires fair value measurements to be disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Partnershipdoes not anticipate that the adoption of SFAS No. 157 will have a material effect on the Partnerships consolidated financial statements.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Partnership has not yet determined whether it will elect the fair value option for any of its financial instruments.



Note B - Deficit in Joint Venture Investment



The Partnership owns a 17.5% general partnership interest in the Sterling Crest Joint Venture ("Sterling Crest") 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.



The Partnership accounts for its 17.5% investment in Sterling Crest on the equity method of accounting. In accordance with the equity method of accounting, the Partnership's original investment in Sterling Crest is increased by advances to Sterling Crest and by the Partnership's share of the earnings of Sterling Crest. The investment is decreased by distributions from Sterling Crest and by the Partnership's share of losses of Sterling Crest. The Partnership's equity in the operations of Sterling Crest amounted to losses of approximately $56,000 and $65,000 for the years ended December 31, 2006 and 2005, respectively. At December 31, 2006, the Partnership had received distributions in excess of its general partnership investment and has an investment deficit of approximately $987,000.



The following table represents Sterling Crest's net liabilities as of December 31, 2006 and net loss for the years ended December 31, 2006 and 2005 (in thousands):



|                  |                  
|----------------- | -----------------
|                  | December 31, 2006
|                  |                  
|Total assets      | $  5,385         
|Total liabilities | (11,025)         
|                  |                  
|Net liabilities   | $(5,640)         













|               |                          |        
|-------------- | ------------------------ | -------
|               | Years Ended December 31,
|               | 2006                     | 2005   
|               |                          |        
|Total revenues | $ 2,557                  | $ 2,344
|Total expenses | (2,879)                  | (2,715)
|               |                          |        
|Net loss       | $(322)                   | $(371) 



Note C - Mortgage Notes Payable



The terms of mortgage notes payable are as follows:



|                        |                |           |          |                |          
|----------------------- | -------------- | --------- | -------- | -------------- | ---------
|                        | Principal      | Monthly   |          |                | Principal
|                        | Balance At     | Payment   | Stated   |                | Balance  
|                        | December 31,   | Including | Interest | Maturity       | Due At   
|Property                | 2006           | Interest  | Rate     | Date           | Maturity 
|                        | (in thousands) |           |          | (in thousands)
|                        |                |           |          |                |          
|Lakeside Apartments (3) | $ 2,649        | $ 11      | (1)      | 09/15/07       | $ 2,599  
|1st mortgage            |                |           |          |                |          
|Bexley House Apartments | 2,029          | 19        | 7.32%(2) | 01/01/21       | --       
|1st mortgage            |                |           |          |                |          
|Covington Pointe        |                |           |          |                |          
|Apartments              | 5,269          | 36        | 3.81%(2) | 07/01/10       | 4,416    
|1st mortgage            |                |           |          |                |          
|                        | $9,947         | $66       |          |                | $7,015   



(1)

Adjustable rate based on the Fannie Mae discounted mortgage-backed security index plus 85 basis points through May 2006 and 105 basis points effective June 2006. The rate at December 31, 2006 was 6.30%.



(2)

Fixed rate mortgage.



(3)

An affiliate of the Managing General Partner guaranteed the obligations and liabilities of the Partnership with respect to this mortgage.



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



The mortgage for Lakeside Apartments is financed under a permanent credit facility ("Permanent Credit Facility").  The Permanent Credit Facility has a maturity date of September 15, 2007, with one five-year extension option. This Permanent Credit Facility creates separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. Each note under this Permanent Credit Facility begins as a variable rate loan with the option of converting to a fixed rate loan after three years. The interest rate on the variable rate loans is the Fannie Mae discounted mortgage-backed security index plus 85 or 105 basis points and resets monthly. Each loan automatically renews at the end of each month. In addition, monthly principal payments are required based on a 30-year amortization schedule, using the interest rate in effect during the first month that any property is in the Permanent Credit Facility. The loans are prepayable without penalty. The lender required an affiliate of the Managing General Partner, AIMCO Properties, LP, to guarantee the loans.



Scheduled principal payments of the mortgage notes payable subsequent to December 31, 2006 are as follows (in thousands):



|           |        
|---------- | -------
|2007       | $ 2,967
|2008       | 333    
|2009       | 350    
|2010       | 4,651  
|2011       | 115    
|Thereafter | 1,531  
|           | $9,947 



Note D  Casualty Gain



In December 2005, Bexley House Apartments suffered fire damage to two of its rental units.  Insurance proceeds of approximately $224,000 were received during the year ended December 31, 2006. The Partnership recognized a casualty gain of approximately $191,000 for the year ended December 31, 2006 as a result of the receipt of approximately $224,000 in insurance proceeds net of the write-off of the undepreciated damaged assets of approximately $33,000.



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 loss and Federal taxable loss (in thousands, except per unit data):



|                             |           |         
|---------------------------- | --------- | --------
|                             | 2006      | 2005    
|                             |           |         
|Net loss as reported         | $  (683)  | $  (817)
|Add (deduct)                 |           |         
|Depreciation differences     | 279       | (164)   
|Equity in joint venture      | 31        | 31      
|Prepaid rents                | (20)      | 17      
|Casualty                     | (191)     | (34)    
|Other                        | (151)     | 71      
|                             |           |         
|Federal taxable loss         | $(735)    | $(896)  
|Federal taxable income       |           |         
|per limited partnership unit | $1.27 (1) | $.57 (1)



(1) For 2006 and 2005 allocations under the Internal Revenue Code section 704(b) result in the limited partners being allocated a non-pro rata amount of taxable loss or income.



The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net assets as of December 31, 2006 (in thousands):



|                               |          
|------------------------------ | ---------
|Net liabilities as reported    | $ (4,090)
|Land and buildings             | 1,292    
|Accumulated depreciation       | 299      
|Syndication                    | 3,809    
|Other                          | 647      
|                               |          
|Net assets - Federal tax basis | $1,957   



Note F - Transactions with Affiliated Parties



The Partnership has no employees and depends on the Managing General Partner and its affiliates for the management and administration of all Partnership activities.  The Partnership Agreement provides for (i) payments to affiliates for property management services and (ii) for reimbursement of certain expenses incurred by affiliates on behalf of the Partnership.



Affiliates of the Managing General Partner 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 $183,000 and $172,000 for the years ended December 31, 2006 and 2005, respectively, which is included in operating expenses.



An affiliate of the Managing General Partner charged the Partnership for reimbursement of accountable administrative expenses amounting to approximately $173,000 and $270,000 for the years ended December 31, 2006 and 2005, respectively, which is included in general and administrative expenses and investment properties. The portion of these reimbursements included in investment properties for the years ended December 31, 2006 and 2005 are charges for construction management services provided by an affiliate of the Managing General Partner of approximately $75,000 and $150,000, respectively. At December 31, 2006, the Partnership owed approximately $106,000 of accrued accountable administrative expenses to an affiliate of the Managing General Partner, which is included in due to affiliates on the accompanying consolidated balance sheet.



During the years ended December 31, 2006 and 2005, an affiliate of the Managing General Partner advanced the Partnership approximately $424,000 and $1,058,000, respectively, to fund capital improvements and pay accounts payable at Bexley House Apartments and Covington Pointe Apartments during 2006 and to primarily fund capital improvements and real estates taxes for the properties during 2005. At December 31, 2006, the amount of the outstanding loans and accrued interest was approximately $3,280,000, which is included in due to affiliates on the accompanying consolidated balance sheet. Interest on the advances was charged at the prime rate plus 1%, or 9.25% at December 31, 2006, in accordance with the Partnership Agreement. Interest expense on advances from affiliates of the Managing General Partner for the years ended December 31, 2006 and 2005 was approximately $276,000 and $149,000, respectively. Subsequent to December 31, 2006, the Managing General Partner advanced approximately $85,000 to the Partnership to pay outstanding payables and real estate taxes at Covington Pointe Apartments.



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, 2006 and 2005.



The Partnership insures its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty, general liability and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Managing General Partner. During the years ended December 31, 2006 and 2005, the Partnership was charged by AIMCO and its affiliates approximately $92,000 and $55,000, respectively, for insurance coverage and fees associated with policy claims administration.



In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 13,189.50 limited partnership units (the "Units") in the Partnership representing 49.26% of the outstanding Units at December 31, 2006.  A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers.  Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.26% of the outstanding Units, AIMCO and its affiliates are in a position to influence all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder.



Note G  Investment Properties and Accumulated Depreciation



|                        |                |                |             |               
|----------------------- | -------------- | -------------- | ----------- | --------------
|                        |                | Initial Cost   |            
|                        |                | To Partnership |            
|                        |                | (in thousands) |            
|                        |                |                |             |               
|                        |                |                |             |               
|                        |                |                | Buildings   | Net Cost      
|                        |                |                | and Related | Capitalized   
|                        |                |                | Personal    | Subsequent to 
|Description             | Encumbrances   | Land           | Property    | Acquisition   
|                        | (in thousands) |                |             | (in thousands)
|Lakeside Apartments     | $ 2,649        | $ 1,259        | $ 5,791     | $  1,764      
|Bexley House Apartments | 2,029          | 647            | 3,067       | 1,828         
|Covington Pointe        |                |                |             |               
|Apartments              | 5,269          | 1,935          | 7,041       | 2,353         
|                        |                |                |             |               
|Totals                  | $9,947         | $3,841         | $15,899     | $5,945        



|                 |                               |             |         |                |              |          |            
|---------------- | ----------------------------- | ----------- | ------- | -------------- | ------------ | -------- | -----------
|                 | Gross Amount At Which Carried |             |         |                |             
|                 | At December 31, 2006          |             |         |                |             
|                 | (in thousands)                |             |         |                |             
|                 |                               | Buildings   |         |                |              |          |            
|                 |                               | And Related |         |                |              |          |            
|                 |                               | Personal    |         | Accumulated    | Date of      | Date     | Depreciable
|Description      | Land                          | Property    | Total   | Depreciation   | Construction | Acquired | Life-Years 
|                 |                               |             |         | (in thousands) |              |          |            
|Lakeside         |                               |             |         |                |              |          |            
|Apartments       | $ 1,046                       | $ 7,768     | $ 8,814 | $ 5,643        | 1980         | 05/86    | 5-30       
|Bexley House     |                               |             |         |                |              |          |            
|Apartments       | 542                           | 5,000       | 5,542   | 2,769          | 1972         | 09/86    | 5-30       
|Covington Pointe |                               |             |         |                |              |          |            
|Apartments       | 1,935                         | 9,394       | 11,329  | 7,072          | 1982         | 03/87    | 5-30       
|                 |                               |             |         |                |              |          |            
|Totals           | $3,523                        | $22,162     | $25,685 | $15,484        |              |          |            





Reconciliation of "investment properties and accumulated depreciation"



|                                       |                          |        
|-------------------------------------- | ------------------------ | -------
|                                       | Years Ended December 31,
|                                       | 2006                     | 2005   
|                                       | (in thousands)          
|Investment Properties                  |                          |        
|Balance at beginning of year           | $24,976                  | $23,654
|Property improvements and replacements | 858                      | 1,322  
|Disposals of property                  | (149)                    | --     
|Balance at end of year                 | $25,685                  | $24,976
|                                       |                          |        
|Accumulated Depreciation               |                          |        
|Balance at beginning of year           | $14,464                  | $13,398
|Additions charged to expense           | 1,136                    | 1,066  
|Disposals of property                  | (116)                    | --     
|Balance at end of year                 | $15,484                  | $14,464



The aggregate cost of the real estate for Federal income tax purposes at December 31, 2006 and 2005, is approximately $26,977,000 and $26,344,000, respectively.  The accumulated depreciation taken for Federal income tax purposes at December 31, 2006 and 2005, is approximately $15,185,000 and $14,328,000, respectively.



Note H  Contingencies



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. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action purported to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) that are named as nominal defendants, challenging, among other things, the acquisition of interests in certain Managing General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities that were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs sought monetary damages and equitable relief, including judicial dissolution of the Partnership. In addition, during the third quarter of 2001, a complaint captioned Heller v. Insignia Financial Group (the "Heller action") was filed against the same defendants that are named in the Nuanes action. On or about August 6, 2001, plaintiffs filed a first amended complaint. The Heller action was brought as a purported derivative action, and asserted claims for, among other things, breach of fiduciary duty, unfair competition, conversion, unjust enrichment, and judicial dissolution. On January 28, 2002, the trial court granted defendants motion to strike the complaint.  Plaintiffs took an appeal from this order.



On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action. On June 13, 2003, the court granted final approval of the settlement and entered judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector ("Objector") filed an appeal (the Appeal) seeking to vacate and/or reverse the order approving the settlement and entering judgment thereto. On May 4, 2004, the Objector filed a second appeal challenging the courts use of a referee and its order requiring Objector to pay those fees.



On March 21, 2005, the Court of Appeals issued opinions in both pending appeals.  With regard to the settlement and judgment entered thereto, the Court of Appeals vacated the trial courts order and remanded to the trial court for further findings on the basis that the state of the record is insufficient to permit meaningful appellate review.  The matter was transferred back to the trial court on June 21, 2005.  With regard to the second appeal, the Court of Appeals reversed the order requiring the Objector to pay referee fees. With respect to the related Heller appeal, on July 28, 2005, the Court of Appeals reversed the trial courts order striking the first amended complaint.



On August 18, 2005, Objector and his counsel filed a motion to disqualify the trial court based on a peremptory challenge and filed a motion to disqualify for cause on October 17, 2005, both of which were ultimately denied and/or struck by the trial court.  On or about October 13, 2005 Objector filed a motion to intervene and on or about October 19, 2005 filed both a motion to take discovery relating to the adequacy of plaintiffs as derivative representatives and a motion to dissolve the anti-suit injunction in connection with settlement.  On November 14, 2005, Plaintiffs filed a Motion For Further Findings pursuant to the remand ordered by the Court of Appeals. Defendants joined in that motion.  On February 3, 2006, the Court held a hearing on the various matters pending before it and ordered additional briefing from the parties and Objector. On June 30, 2006, the trial court entered an order confirming its approval of the class action settlement and entering judgment thereto after the Court of Appeals had remanded the matter for further findings.  The substantive terms of the settlement agreement remain unchanged.  The trial court also entered supplemental orders on July 1, 2006, denying Objectors Motion to File a Complaint in Intervention, Objectors Motion for Leave of Discovery and Objectors Motion to Dissolve the Anti-Suit Injunction.  Notice of Entry of Judgment was served on July 10, 2006. On August 31, 2006, the Objector filed a Notice of Appeal to the Courts June 30, 2006 and July 1, 2006 orders. On December 14, 2006, Objector filed his Appellants Brief.  The Partnership and its affiliates, as well as counsel of the Settlement Class, have not yet filed their briefs in response.



The Managing General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnerships overall operations.



AIMCO Properties, L.P. and NHP Management Company, both affiliates of the Managing General Partner, are defendants in a lawsuit alleging that they willfully violated the Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime for all hours worked in excess of forty per week. The complaint, filed in the United States District Court for the District of Columbia, attempts to bring a collective action under the FLSA and seeks to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties, L.P. and NHP Management Company failed to compensate maintenance workers for time that they were required to be "on-call." Additionally, the complaint alleges AIMCO Properties, L.P. and NHP Management Company failed to comply with the FLSA in compensating maintenance workers for time that they worked in excess of 40 hours in a week.   In June 2005 the court conditionally certified the collective action on both the on-call and overtime issues.  Approximately 1,049 individuals opted in to the class. On March 28, 2007, the court issued an opinion decertifying the collective action on both issues.  The court held that the members of the collective action are not similarly situated and the case may not proceed as a collective action.  The nine named plaintiffs still maintain their individual causes of action. The California and Maryland cases are still pending as they were stayed pending the outcome of the decertification motion in the District of Columbia case.  Although the outcome of any litigation is uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome will have a material adverse effect on its consolidated financial condition or results of operations. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnerships consolidated financial condition or results of operations.



The Partnership is unaware of any other pending or outstanding litigation matters involving it or its investment properties that are not of a routine nature arising in the ordinary course of business.



Environmental



Various Federal, state and local laws subject property owners or operators to liability for management, and the costs of removal or remediation, of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of the hazardous substances. The presence of, or the failure to manage or remedy properly, hazardous substances may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected properties. In addition to the costs associated with investigation and remediation actions brought by government agencies, and potential fines or penalties imposed by such agencies in connection therewith, the presence of hazardous substances on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal, remediation or disposal of hazardous substances through a licensed disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of its properties, the Partnership could potentially be liable for environmental liabilities or costs associated with its properties.



Mold



The Partnership is aware of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold, some of which have resulted in substantial monetary judgments or settlements.  The Partnership has only limited insurance coverage for property damage loss claims arising from the presence of mold and for personal injury claims related to mold exposure.  Affiliates of the Managing General Partner have implemented policies, procedures, third-party audits and training and the Managing General Partner believes that these measures will prevent or eliminate mold exposure and will minimize the effects that mold may have on residents.  To date, the Partnership has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions.  Because the law regarding mold is unsettled and subject to change the Managing General Partner can make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on the Partnerships consolidated financial condition or results of operations.



Item 8.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



Item 8a.

Controls and Procedures



(a)

Disclosure Controls and Procedures. The Partnerships management, with the participation of the principal executive officer and principal financial officer of the Managing General Partner, who are the equivalent of the Partnerships principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnerships disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer of the Managing General Partner, who are the equivalent of the Partnerships principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnerships disclosure controls and procedures are effective.



(b)

Internal Control Over Financial Reporting. There have not been any changes in the Partnerships internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Partnerships internal control over financial reporting.



Item 8b.

Other Information



None.



PART III



Item 9.

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



The Partnership does not have any directors or officers. The names of the directors and 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 directors and officers.



|                     |     |                                               
|-------------------- | --- | ----------------------------------------------
|Name                 | Age | Position                                      
|                     |     |                                               
|Martha L. Long       | 47  | Director and Senior Vice President            
|Harry G. Alcock      | 44  | Director, Executive Vice President and Chief  
|                     |     | Investment Officer                            
|Timothy Beaudin      | 48  | Executive Vice President and Chief Development
|                     |     | Officer                                       
|Miles Cortez         | 63  | Executive Vice President, General Counsel     
|                     |     | and Secretary                                 
|Patti K. Fielding    | 43  | Executive Vice President  Securities and Debt
|Thomas M. Herzog     | 44  | Executive Vice President and Chief            
|                     |     | Financial Officer                             
|Robert Y. Walker, IV | 41  | Executive Vice President                      
|Scott W. Fordham     | 39  | Senior Vice President and Chief Accounting    
|                     |     | Officer                                       
|Stephen B. Waters    | 45  | Vice President                                



Martha L. Long has been a Director and Senior Vice President of the Managing General Partner since February 2004.  Ms. Long has been with AIMCO since October 1998 and has served in various capacities.  From 1998 to 2001, Ms. Long served as Senior Vice President and Controller of AIMCO and the Managing General Partner.  During 2002 and 2003, Ms. Long served as Senior Vice President of Continuous Improvement for AIMCO.



Harry G. Alcock was appointed as a Director of the Managing General Partner in October 2004 and was appointed Executive Vice President of the Managing General Partner in February 2004 and has been Executive Vice President and Chief Investment Officer of AIMCO since October 1999.  Mr. Alcock has had responsibility for acquisition and financing activities of AIMCO since July 1994, serving as Vice President from July 1996 to October 1997 and as Senior Vice President from October 1997 to October 1999.



Timothy Beaudin was appointed Executive Vice President and Chief Development Officer of the Managing General Partner and AIMCO in October 2005.  Prior to this time, beginning in 2005, Mr. Beaudin was with Catellus Development Corporation, a San Francisco, California-based real estate investment trust.  During his last five years at Catellus, Mr. Beaudin served as Executive Vice President, with management responsibility for development, construction and asset management.



Miles Cortez was appointed Executive Vice President, General Counsel and Secretary of the Managing General Partner in February 2004 and of AIMCO in August 2001.  Prior to joining AIMCO, Mr. Cortez was the senior partner of Cortez Macaulay Bernhardt & Schuetze LLC, a Denver law firm, from December 1997 through September 2001.



Patti K. Fielding was appointed Executive Vice President  Securities and Debt of the Managing General Partner in February 2004 and of AIMCO in February 2003.  Ms. Fielding was appointed Treasurer of AIMCO in January 2005.  Ms. Fielding is responsible for debt financing and the treasury department.  Ms. Fielding previously served as Senior Vice President  Securities and Debt of AIMCO from January 2000 to February 2003. Ms. Fielding joined AIMCO in February 1997 as a Vice President.



Thomas M. Herzog was appointed Chief Financial Officer of the Managing General Partner and AIMCO in November 2005 and was appointed Executive Vice President of the Managing General Partner and AIMCO in July 2005.  In January 2004, Mr. Herzog joined AIMCO as Senior Vice President and Chief Accounting Officer and of the Managing General Partner in February 2004.  Prior to joining AIMCO in January 2004, Mr. Herzog was at GE Real Estate, serving as Chief Accounting Officer & Global Controller from April 2002 to January 2004 and as Chief Technical Advisor from March 2000 to April 2002.  Prior to joining GE Real Estate, Mr. Herzog was at Deloitte & Touche LLP from 1990 to 2000.



Robert Y. Walker, IV was appointed Senior Vice President of the Managing General Partner and AIMCO in August 2005 and served as the Chief Accounting Officer of the Managing General Partner and AIMCO from November 2005 to January 2007. Mr. Walker was promoted to Executive Vice President of the Managing General Partner and AIMCO in July 2006 and in January 2007 became the chief financial officer of Conventional Property Operations for AIMCO. From June 2002, until he joined AIMCO, Mr. Walker served as senior vice president and chief financial officer at Miller Global Properties, LLC, a Denver-based private equity, real estate fund manager.  From May 1997 to June 2002, Mr. Walker was employed by GE Capital Real Estate, serving as global controller from May 2000 to June 2002.



Scott W. Fordham was appointed Senior Vice President and Chief Accounting Officer in January 2007 of the Managing General Partner and AIMCO. Prior to joining AIMCO, Mr. Fordham served as Vice President and Chief Accounting Officer of Brandywine Realty Trust. Prior to the merger of Prentiss Properties Trust with Brandywine Realty Trust, Mr. Fordham served as Senior Vice President and Chief Accounting Officer of Prentiss Properties Trust and was in charge of the corporate accounting and financial reporting groups. Prior to joining Prentiss Properties Trust in 1992, Mr. Fordham worked in public accounting with PricewaterhouseCoopers LLP.



Stephen B. Waters was appointed Vice President of the Managing General Partner and AIMCO in April 2004.  Mr. Waters previously served as a Director of Real Estate Accounting since joining AIMCO in September 1999.  Mr. Waters has responsibility for partnership accounting with AIMCO and serves as principal financial officer of the Managing General Partner.



One or more of the above persons are also directors and/or officers of a general partner (or general partner of a general partner) of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act: Further, one or more of the above persons are also officers of Apartment Investment and Management Company and the general partner of AIMCO Properties, L.P., entities that have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15 (d) of such Act.



The board of directors of the Managing General Partner does not have a separate audit committee. As such, the board of directors of the Managing General Partner fulfills the functions of an audit committee. The board of directors has determined that Martha L. Long meets the requirement of an "audit committee financial expert".



The directors and officers of the Managing General Partner with authority over the Partnership are all employees of subsidiaries of AIMCO. AIMCO has adopted a code of ethics that applies to such directors and officers that is posted on AIMCO's website (www.AIMCO.com). AIMCO's website is not incorporated by reference to this filing.



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, 2006.



Item 11.

Security Ownership of Certain Beneficial Owners and Management



Except as noted below, no person or entity was known by the Partnership to be the beneficial owners of more than 5% of the Limited Partnership Units of the Partnership as of December 31, 2006.



|                                |                 |           
|------------------------------- | --------------- | ----------
|                                |                 | Percentage
|Entity                          | Number of Units | of Total  
|                                |                 |           
|AIMCO IPLP, L.P. (1)            | 570             | 2.13%     
|(an affiliate of AIMCO)         |                 |           
|AIMCO Properties, L.P. (2)      | 8,789.50        | 32.83%    
|(an affiliate of AIMCO)         |                 |           
|Cooper River Properties (1)     | 3,830           | 14.30%    
|(an affiliate of AIMCO)         |                 |           
|                                |                 |           
|Hospital Corporation of America | 3,000           | 11.20%    
|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 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237.



As of December 31, 2006, 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 Partnerships Units. No such director or officer had any right to acquire beneficial ownership of additional Units of the Partnership.



Item 12.

Certain Relationships and Related Transactions, and Director Independence



The Partnership has no employees and depends on the Managing General Partner and its affiliates for the management and administration of all Partnership activities.  The Partnership Agreement provides for (i) payments to affiliates for property management services and (ii) for reimbursement of certain expenses incurred by affiliates on behalf of the Partnership.



Affiliates of the Managing General Partner 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 $183,000 and $172,000 for the years ended December 31, 2006 and 2005, respectively, which is included in operating expenses.



An affiliate of the Managing General Partner charged the Partnership for reimbursement of accountable administrative expenses amounting to approximately $173,000 and $270,000 for the years ended December 31, 2006 and 2005, respectively, which is included in general and administrative expenses and investment properties. The portion of these reimbursements included in investment properties for the years ended December 31, 2006 and 2005 are charges for construction management services provided by an affiliate of the Managing General Partner of approximately $75,000 and $150,000, respectively. At December 31, 2006, the Partnership owed approximately $106,000 of accrued accountable administrative expenses to an affiliate of the Managing General Partner, which is included in due to affiliates.



During the years ended December 31, 2006 and 2005, an affiliate of the Managing General Partner advanced the Partnership approximately $424,000 and $1,058,000, respectively, to fund capital improvements and pay accounts payable at Bexley House Apartments and Covington Pointe Apartments during 2006 and to primarily fund capital improvements and real estates taxes for the properties during 2005. At December 31, 2006, the amount of the outstanding loans and accrued interest was approximately $3,280,000, which is included in due to affiliates. Interest on the advances was charged at the prime rate plus 1%, or 9.25% at December 31, 2006, in accordance with the Partnership Agreement. Interest expense on advances from affiliates of the Managing General Partner for the years ended December 31, 2006 and 2005 was approximately $276,000 and $149,000, respectively. Subsequent to December 31, 2006, the Managing General Partner advanced approximately $85,000 to the Partnership to pay outstanding payables and real estate taxes at Covington Pointe Apartments.



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, 2006 and 2005.



The Partnership insures its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty, general liability and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Managing General Partner. During the years ended December 31, 2006 and 2005, the Partnership was charged by AIMCO and its affiliates approximately $92,000 and $55,000, respectively, for insurance coverage and fees associated with policy claims administration.



In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 13,189.50 limited partnership units (the "Units") in the Partnership representing 49.26% of the outstanding Units at December 31, 2006.  A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers.  Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 49.26% of the outstanding Units, AIMCO and its affiliates are in a position to influence all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO as its sole stockholder.



Neither of the Managing General Partners directors is independent under the independence standards established for New York Stock Exchange listed companies as both directors are employed by the parent of the Managing General Partner.



Item 13.

Exhibits



See Exhibit Index.



Item 14.

Principal Accountant Fees and Services



The Managing General Partner has reappointed Ernst & Young LLP as independent auditors to audit the consolidated financial statements of the Partnership for 2007.  The aggregate fees billed for services rendered by Ernst & Young LLP for 2006 and 2005 are described below.



Audit Fees. Fees for audit services totaled approximately $46,000 and $43,000 for 2006 and 2005, respectively.  Fees for audit services also include fees for the reviews of the Partnerships Quarterly Reports on Form 10-QSB.



Tax Fees. Fees for tax services totaled approximately $12,000 and $11,000 for 2006 and 2005, respectively.



SIGNATURES







In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant 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/Martha L. Long                     
| | Martha L. Long                              
| | Senior Vice President                       
| |                                             
| | By:   /s/Stephen B. Waters                  
| | Stephen B. Waters                           
| | Vice President                              
| |                                             
| | Date: March 30, 2007                        



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/Harry G. Alcock   | Director and Executive | Date: March 30, 2007
|Harry G. Alcock      | Vice President         |                     
|                     |                        |                     
|/s/Martha L. Long    | Director and Senior    | Date: March 30, 2007
|Martha L. Long       | Vice President         |                     
|                     |                        |                     
|/s/Stephen B. Waters | Vice President         | Date: March 30, 2007
|Stephen B. Waters    |                        |                     



|                               
|-------------------------------
|DAVIDSON INCOME REAL ESTATE, LP
|EXHIBIT INDEX                  





Exhibit



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.



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.



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.



10N

Amendment to Reinstated and Amended Contract 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 for The Bexley House 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.



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.



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 Current Report on Form 8-K 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 Current Report on Form 8-K dated December 29, 1987.



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 Current Report on Form 8-K dated December 29, 1987.



10RR

Multifamily Note dated December 15, 2000, between Davidson Income Real Estate, L.P., a Delaware limited partnership and Reilly Mortgage Group, Inc., a District of Columbia corporation, related to Bexley House Apartments, incorporated by reference to Form 10-KSB dated March 30, 2001.



10TT

Contracts related to refinancing of debt of Covington Pointe Apartments:



(a)

Multifamily Note dated June 26, 2003 between AIMCO Covington Pointe, L.P., a Delaware limited partnership, and Keycorp Real Estate Capital Markets, Inc., an Ohio corporation, incorporated by reference to Form 8-K dated June 26, 2003.



(b)

Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated June 26, 2003 between AIMCO Covington Pointe, L.P., a Delaware limited partnership, and Keycorp Real Estate Capital Markets, Inc., an Ohio corporation, incorporated by reference to Form 8-K dated June 26, 2003.



(c)

Replacement Reserve and Security Agreement dated June 26, 2003 between AIMCO Covington Pointe, L.P., a Delaware limited partnership, and Keycorp Real Estate Capital Markets, Inc., an Ohio corporation, incorporated by reference to Form 8-K dated June 26, 2003.



10UU

Contracts related to refinancing of debt of Lakeside Apartments:



(a)

Multifamily Note dated November 3, 2003 between Davidson Income Real Estate, L.P., a Delaware limited partnership, and GMAC Commercial Mortgage Corporation, a California corporation, incorporated by reference to Form 10-QSB dated November 13, 2003.



b)

Guaranty dated November 3, 2003 by AIMCO Properties, L.P., a Delaware limited partnership, for the benefit of GMAC Commercial Mortgage Corporation, a California corporation, incorporated by reference to Form 10-QSB dated November 13, 2003.



c)

Multifamily Deed of Trust, Assignment of Rents and Security Agreement dated November 3, 2003 between Davidson Income Real Estates, L.P., a Delaware limited partnership, and GMAC Commercial Mortgage Corporation, a California corporation, incorporated by reference to Form 10-QSB dated November 13, 2003.



d)

Replacement Reserve and Security Agreement dated November 3, 2003 between Davidson Income Real Estates, L.P., a Delaware limited partnership, and GMAC Commercial Mortgage Corporation, a California corporation, incorporated by reference to Form 10-QSB dated November 13, 2003.



31.1

Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2

Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32.1

Certification of equivalent of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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.











Exhibit 31.1

CERTIFICATION

I, Martha L. Long, certify that:

1.

I have reviewed this annual report on Form 10-KSB of Davidson Income Real Estate, L.P.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;



4.

The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:



(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(c)

Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and



5.

The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):



(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and



(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.



Date: March 30, 2007

/s/Martha L. Long

Martha L. Long

Senior Vice President of Davidson Diversified Properties, Inc., equivalent of the chief executive officer of the Partnership











Exhibit 31.2

CERTIFICATION

I, Stephen B. Waters, certify that:

1.

I have reviewed this annual report on Form 10-KSB of Davidson Income Real Estate, L.P.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;



4.

The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:



(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(c)

Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and



5.

The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):



(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and



(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.



Date: March 30, 2007

/s/Stephen B. Waters

Stephen B. Waters

Vice President of Davidson Diversified Properties, Inc., equivalent of the chief financial officer of the Partnership











Exhibit 32.1





|                                             
|---------------------------------------------
|Certification of CEO and CFO                 
|Pursuant to 18 U.S.C. Section 1350,          
|As Adopted Pursuant to                       
|Section 906 of the Sarbanes-Oxley Act of 2002







In connection with the Annual Report on Form 10-KSB of Davidson Income Real Estate, L.P. (the "Partnership"), for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Martha L. Long, as the equivalent of the chief executive officer of the Partnership, and Stephen B. Waters, as the equivalent of the chief financial officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:



(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.



| |                        
| | -----------------------
| | /s/Martha L. Long      
| | Name: Martha L. Long   
| | Date: March 30, 2007   
| |                        
| | /s/Stephen B. Waters   
| | Name: Stephen B. Waters
| | Date: March 30, 2007   



This certification is furnished with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.