UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



Form 10-QSB



(Mark One)

[X]

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



For the quarterly period ended June 30, 2006





[ ]

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





For the transition period from _________to _________



Commission file number 0-14530





DAVIDSON INCOME REAL ESTATE, L.P.

(Exact Name of Small Business Issuer as Specified 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)



(864) 239-1000

(Issuer's telephone number)



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X  No ___



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







PART I  FINANCIAL INFORMATION



ITEM 1.

FINANCIAL STATEMENTS







DAVIDSON INCOME REAL ESTATE, L.P.



CONSOLIDATED BALANCE SHEET

(Unaudited)

(in thousands, except unit data)



June 30, 2006







|                                          |           |         
|----------------------------------------- | --------- | --------
|Assets                                    |           |         
|Cash and cash equivalents                 |           | $    190
|Receivables and deposits                  |           | 142     
|Restricted escrows                        |           | 45      
|Other assets                              |           | 312     
|Investment properties:                    |           |         
|Land                                      | $  3,523  |         
|Buildings and related personal property   | 21,854    |         
|                                          | 25,377    |         
|Less accumulated depreciation             | (14,911)  | 10,466  
|                                          |           | $11,155 
|Liabilities and Partners' Deficit         |           |         
|Liabilities                               |           |         
|Accounts payable                          |           | $     70
|Tenant security deposit liabilities       |           | 73      
|Accrued property taxes                    |           | 225     
|Other liabilities                         |           | 172     
|Due to affiliates (Note B)                |           | 3,247   
|Deficit in joint venture (Note C)         |           | 950     
|Mortgage notes payable                    |           | 10,138  
|                                          |           |         
|Partners' Deficit                         |           |         
|General partners                          | $   (884) |         
|Limited partners (26,776 units issued and |           |         
|outstanding)                              | (2,836)   | (3,720) 
|                                          |           | $11,155 





See Accompanying Notes to Consolidated Financial Statements















DAVIDSON INCOME REAL ESTATE, L.P.



CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per unit data)





|                                 |                    |                  |          |         
|-------------------------------- | ------------------ | ---------------- | -------- | --------
|                                 | Three Months Ended | Six Months Ended
|                                 | June 30,           | June 30,        
|                                 | 2006               | 2005             | 2006     | 2005    
|Revenues:                        |                    |                  |          |         
|Rental income                    | $   852            | $   810          | $ 1,664  | $ 1,629 
|Other income                     | 81                 | 68               | 143      | 130     
|Casualty gain (Note D)           | 183                | --               | 183      | --      
|Total revenues                   | 1,116              | 878              | 1,990    | 1,759   
|                                 |                    |                  |          |         
|Expenses:                        |                    |                  |          |         
|Operating                        | 489                | 459              | 1,014    | 901     
|General and administrative       | 60                 | 53               | 101      | 95      
|Depreciation                     | 282                | 261              | 562      | 514     
|Interest                         | 208                | 160              | 392      | 312     
|Property taxes                   | 112                | 92               | 215      | 190     
|Total expenses                   | 1,151              | 1,025            | 2,284    | 2,012   
|                                 |                    |                  |          |         
|Loss before equity in loss of    |                    |                  |          |         
|joint venture                    | (35)               | (147)            | (294)    | (253)   
|Equity in loss of joint venture  | (20)               | (10)             | (19)     | (25)    
|                                 |                    |                  |          |         
|Net loss                         | $(55)              | $(157)           | $(313)   | $(278)  
|                                 |                    |                  |          |         
|Net loss allocated to general    |                    |                  |          |         
|partners (3%)                    | $    (1)           | $    (4)         | $    (9) | $    (8)
|Net loss allocated to limited    |                    |                  |          |         
|partners (97%)                   | (54)               | (153)            | (304)    | (270)   
|                                 | $(55)              | $(157)           | $(313)   | $(278)  
|Net loss per limited partnership |                    |                  |          |         
|unit                             | $(2.01)            | $(5.71)          | $(11.35) | $(10.08)



See Accompanying Notes to Consolidated Financial Statements





















DAVIDSON INCOME REAL ESTATE, L.P.



CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT

(Unaudited)

(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, 2005              | 26,776      | $  (875) | $(2,532) | $(3,407)
|                               |             |          |          |         
|Net loss for the six months    |             |          |          |         
|ended June 30, 2006            | --          | (9)      | (304)    | (313)   
|                               |             |          |          |         
|Partners' deficit at           |             |          |          |         
|June 30, 2006                  | 26,776      | $(884)   | $(2,836) | $(3,720)



See Accompanying Notes to Consolidated Financial Statements













DAVIDSON INCOME REAL ESTATE, L.P.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

|                                                      |                  |         
|----------------------------------------------------- | ---------------- | --------
|                                                      | Six Months Ended
|                                                      | June 30,        
|                                                      | 2006             | 2005    
|Cash flows from operating activities:                 |                  |         
|Net loss                                              | $  (313)         | $  (278)
|Adjustments to reconcile net loss to net cash         |                  |         
|provided by operating activities:                     |                  |         
|Casualty gain                                         | (183)            | --      
|Depreciation                                          | 562              | 514     
|Amortization of loan costs                            | 18               | 18      
|Equity in loss of joint venture                       | 19               | 25      
|Change in accounts:                                   |                  |         
|Receivables and deposits                              | 8                | (31)    
|Other assets                                          | (79)             | (47)    
|Accounts payable                                      | (28)             | (48)    
|Tenant security deposit liabilities                   | 8                | 2       
|Accrued property taxes                                | (100)            | (180)   
|Other liabilities                                     | 17               | 9       
|Due to affiliates                                     | 188              | 89      
|Net cash provided by operating activities             | 117              | 73      
|                                                      |                  |         
|Cash flows from investing activities:                 |                  |         
|Property improvements and replacements                | (558)            | (857)   
|Net (deposits to) withdrawals from restricted escrows | (24)             | 37      
|Insurance proceeds received                           | 217              | --      
|Net cash used in investing activities                 | (365)            | (820)   
|                                                      |                  |         
|Cash flows from financing activities:                 |                  |         
|Payments on mortgage notes payable                    | (187)            | (179)   
|Advances from affiliates                              | 424              | 771     
|Net cash provided by financing activities             | 237              | 592     
|                                                      |                  |         
|Net decrease in cash and cash equivalents             | (11)             | (155)   
|Cash and cash equivalents at beginning of period      | 201              | 322     
|Cash and cash equivalents at end of period            | $190             | $167    
|                                                      |                  |         
|Supplemental disclosure of cash flow information:     |                  |         
|Cash paid for interest                                | $258             | $239    
|Supplemental disclosure of non-cash activity:         |                  |         
|Property improvements and replacements in accounts    |                  |         
|payable                                               | $13              | $92     



At December 31, 2005 and 2004, approximately $21,000 and $49,000 of property improvements and replacements were included in accounts payable and are included in property improvements and replacements at June 30, 2006 and 2005, respectively.



See Accompanying Notes to Consolidated Financial Statements















DAVIDSON INCOME REAL ESTATE, L.P.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)





Note A  Basis of Presentation



The accompanying unaudited consolidated financial statements of Davidson Income Real Estate, L.P. (the "Partnership" or "Registrant") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of Davidson Diversified Properties, Inc. (the "Managing General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six month periods ended June 30, 2006, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005. The Managing General Partner is a subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust.



Note B  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 services and (ii) 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 investment properties as compensation for providing property management services.  The Partnership paid to such affiliates approximately $88,000 and $86,000 for the six months ended June 30, 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 $114,000 and $107,000 for the six months ended June 30, 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 six months ended June 30, 2006 and 2005 are fees related to construction management services provided by an affiliate of the Managing General Partner of approximately $55,000 and $47,000, respectively. At June 30, 2006, the Partnership owed approximately $115,000 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 six months ended June 30, 2006 an affiliate of the Managing General Partner advanced approximately $424,000 to the Partnership to pay accounts payable and capital expenditures at Bexley House Apartments and Covington Pointe Apartments. During the six months ended June 30, 2005 an affiliate of the Managing General Partner advanced approximately $771,000 to the Partnership to pay real estate taxes at the investment properties. At June 30, 2006, the amount of outstanding loans and accrued interest was approximately $3,132,000, which is included in due to affiliates on the accompanying consolidated balance sheet. Interest on the advances is charged at prime plus 1%, or 9.25% at June 30, 2006. Interest expense on the advances was approximately $127,000 and $53,000 for the six months ended June 30, 2006 and 2005, respectively.



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 six months ended June 30, 2006, the Partnership was charged by AIMCO and its affiliates approximately $89,000 for hazard insurance coverage and fees associated with policy claims administration.  Additional charges will be incurred by the Partnership during 2006 as other insurance policies renew later in the year.  The Partnership was charged by AIMCO and its affiliates approximately $55,000 for insurance coverage and fees associated with policy claims administration during the year ended December 31, 2005.



Note C  Deficit in Joint Venture Investment



The Partnership owns a 17.5% interest in the Sterling Crest Joint Venture (the Joint Venture) with Davidson Growth Plus, L.P., an affiliate of the Managing General Partner, which owns the remaining 82.5% of the Joint Venture.



There were no distributions received from the Joint Venture during the six months ended June 30, 2006 and 2005. During the six months ended June 30, 2006 and 2005 the Partnership recognized approximately $19,000 and $25,000 of equity in loss of the Joint Venture. At June 30, 2006, the Partnership had received distributions and recognized equity in losses of the Joint Venture in excess of its general partnership interest and has an investment deficit of approximately $950,000.



The following table represents the net loss of the Sterling Crest Joint Venture for the six months ended June 30, 2006 and 2005 (in thousands):



|               |                           |        
|-------------- | ------------------------- | -------
|               | Six Months Ended June 30,
|               | 2006                      | 2005   
|               |                           |        
|Total revenues | $ 1,258                   | $ 1,124
|Total expenses | (1,364)                   | (1,268)
|Net loss       | $(106)                    | $(144) 



Note D  Casualty



In December 2005, Bexley House Apartments suffered fire damage to two of its rental units.  Insurance proceeds of approximately $217,000 were received during the six months ended June 30, 2006.  The Partnership recognized a casualty gain of approximately $183,000 during the six months ended June 30, 2006 as a result of the receipt of approximately $217,000 in insurance proceeds net of the write-off of the undepreciated assets of approximately $34,000.



Note E  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.



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. The defendants are moving to decertify the collective action on both issues in briefs to be filed by August 15, 2006.  Because the court denied
plaintiffs motion to certify state subclasses, on September 26, 2005, the plaintiffs filed a class action with the same allegations in the Superior Court of California (Contra Costa County), and on November 5, 2005 in Montgomery County Maryland Circuit Court.  The California case has been stayed, and the defendants have moved to stay the Maryland case as well. 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 a national policy and procedures to prevent or eliminate mold from its properties and the Managing General Partner believes that these measures will minimize the effects that mold could 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 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



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 Partnership's financial statements and the notes thereto, as well as the risk factors described in the documents the Partnership files from time to time with the Securities and Exchange Commission.



The Partnership's investment properties consist of three apartment complexes.  The following table sets forth the average occupancy of the properties for the six months ended June 30, 2006 and 2005:



|                            |                   |     
|--------------------------- | ----------------- | ----
|                            | Average Occupancy
|Property                    | 2006              | 2005
|                            |                   |     
|Lakeside Apartments (1)     | 91%               | 94% 
|Charlotte, North Carolina   |                   |     
|Bexley House Apartments     | 83%               | 83% 
|Columbus, Ohio              |                   |     
|Covington Pointe Apartments | 98%               | 94% 
|Dallas, Texas (2)           |                   |     



(1)

The Managing General Partner attributes the decrease in occupancy at Lakeside Apartments to a more stringent acceptance policy in order to create a more stable tenant base.



(2)

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



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



For the three and six months ended June 30, 2006, the Partnership had a net loss of approximately $55,000 and $313,000, respectively, compared to a net loss of approximately $157,000 and $278,000 for the three and six months ended June 30, 2005, respectively. The decrease in net loss for the three months ended June 30, 2006 is due to an increase in total revenues partially offset by an increase in total expenses.  The increase in net loss for the six months ended June 30, 2006 is due to an increase in total expenses partially offset by an increase in total revenues.



Total revenues increased for both the three and six months ended June 30, 2006 due to an increase in 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 Covington Pointe Apartments partially offset by a decrease in occupancy at Lakeside Apartments and 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 $217,000 were received during the six months ended June 30, 2006.  The Partnership recognized a casualty gain of approximately $183,000 during the six months ended June 30, 2006 as a result of the receipt of approximately $217,000 in insurance proceeds net of the write-off of the undepreciated assets of approximately $34,000.



The increase in total expenses for both the three and six months ended June 30, 2006 is due to increases in operating, depreciation, interest, and property tax expenses. Operating expense increased due to an increase in property, administrative, insurance and maintenance expenses. Property expense increased due to an increase in payroll and related benefits at Lakeside Apartments and Covington Pointe Apartments.  Administrative expense increased due to an increase in office and computer supplies along with training and travel expenses.  Insurance expense increased due to an increase in hazard insurance premiums at all three investment properties.  Maintenance expense increased due to an increase in contract labor costs at Lakeside Apartments. Depreciation expense increased due to assets being placed into service over the last twelve months primarily at Lakeside Apartments.  Interest expense increased due to higher variable interest rates at Lakeside Apartments and 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 rate charged on such advances.  Property tax expense increased due to an increase in the assessed value of Bexley House Apartments.



Included in general and administrative expense for the six months ended June 30, 2006 and 2005 are 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 $19,000 for the six months ended June 30, 2006.  The Partnership recognized equity in loss of the Joint Venture of approximately $25,000 for the six months ended June 30, 2005.



Liquidity and Capital Resources



At June 30, 2006, the Partnership had cash and cash equivalents of approximately $190,000 compared to approximately $167,000 at June 30, 2005.  Cash and cash equivalents decreased approximately $11,000 since December 31, 2005 due to approximately $365,000 of cash used in investing activities partially offset by approximately $237,000 of cash provided by financing activities and approximately
$117,000 of cash provided by operating activities.  Cash used in investing activities consisted of property improvements and replacements and net deposits to restricted escrows maintained by the mortgage lender partially offset by 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.  Capital improvements planned for each of the Partnerships properties are detailed below.



Lakeside Apartments



During the six months ended June 30, 2006, the Partnership completed approximately $100,000 of capital improvements at Lakeside Apartments, consisting primarily of countertop resurfacing, sewer and water upgrades, appliance and floor covering replacements, roof replacements and decking for the swimming pool. 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 2006.  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 six months ended June 30, 2006, the Partnership completed approximately $376,000 of capital improvements at Bexley House Apartments, consisting primarily of casualty repairs related to the December 2005 fire and appliance and floor covering replacements. Included in these costs are capitalized construction period interest, taxes and operating costs of approximately $15,000, $9,000, 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 2006. 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 six months ended June 30, 2006, the Partnership completed approximately $74,000 of capital improvements at Covington Pointe Apartments, consisting primarily of countertop resurfacing 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 2006. Such capital expenditures will depend on the physical condition of the property as well as anticipated cash flow generated by the property.



Capital expenditures will be incurred only if cash is available from operations, Partnership reserves or advances from an affiliate 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 $10,138,000 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 mortgage encumbering Bexley House Apartments matures in July 2021 at which time the loan is scheduled to be fully amortized. The Managing General Partner has the option to extend the maturity of the mortgage encumbering Lakeside Apartments for an additional five years. 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.



No cash distributions were made during the six months ended June 30, 2006 and 2005.  Future cash distributions will depend on the levels of net cash generated from operations, and the timing of debt maturities, property sales and/or refinancings.  The Partnerships cash available for distribution is reviewed on a monthly basis.  In light of the significant amounts due to an affiliate of the Managing General Partner at June 30, 2006, it is not anticipated that the Partnership will make any distributions in the foreseeable future.



Other



In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 13,179.50 limited partnership units (the "Units") in the Partnership representing 49.22% of the outstanding Units at June 30, 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 49.22% 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



The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Partnership to make estimates and assumptions. 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 associated with redevelopment projects are capitalized in accordance with Statement of Financial Accounting Standards (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.  The Partnership capitalizes interest, property taxes and operating costs in accordance with SFAS No. 34 Capitalization of Interest Costs during periods in which redevelopment and construction projects are in progress.



ITEM 3.

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 fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Partnerships internal control over financial reporting.



PART II - OTHER INFORMATION





ITEM 1.

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.



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. The defendants are moving to decertify the collective action on both issues in briefs to be filed by August 15, 2006.  Because the court denied plaintiffs motion to certify state subclasses, on September 26, 2005, the plaintiffs filed a class action with the same allegations in the Superior Court of California (Contra Costa County), and on November 5, 2005 in Montgomery County Maryland Circuit Court.  The California case has been stayed, and the defendants have moved to stay the Maryland case as well. 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 5.

OTHER INFORMATION



None.



ITEM 6.

EXHIBITS



See Exhibit Index.











SIGNATURES







In accordance with the requirements 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                    
|                      |                                             
|Date: August 11, 2006 | By:   /s/Martha L. Long                     
|                      | Martha L. Long                              
|                      | Senior Vice President                       
|                      |                                             
|Date: August 11, 2006 | By:   /s/Stephen B. Waters                  
|                      | Stephen B. Waters                           
|                      | Vice President                              















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 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 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 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 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 quarterly report on Form 10-QSB 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: August 11, 2006

/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 quarterly report on Form 10-QSB 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: August 11, 2006

/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 Quarterly Report on Form 10-QSB of Davidson Income Real Estate, L.P. (the "Partnership"), for the quarterly period ended June 30, 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: August 11, 2006  
| |                        
| | /s/Stephen B. Waters   
| | Name: Stephen B. Waters
| | Date: August 11, 2006  





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.