The carnaval holiday off days are 5 days (Sat-Wed) but all the festivities revolves around the samba schools parading in this samba-only stadium called the Sambodromo. The Rio carnaval is on Sunday and Monday (which is what they televise). Samba schools prepare year round, with huge budgets making elaborate parade carts. They are usually neighborhood based, so all local folks join the school or just commit to participate, thousands of people choreographs in blocks of 200-300 people in whatever theme they chose for the year, each school parade consist of 5000-6000 people. Its all a competition among the schools with juries and all (samba is serious business) and declared winners.
Parading starts on sunset and ends around 5am, there you can't participate but you can go to the sambodromo and watch the shows and get pissed drunk. Can be fun, drinks, music, half naked girls shaking ass. If you are going to be there before it all, you can go to the school's practice, leading up to the event they practice a ton. You can go there and listen to music for hours, drinks, and just see everything, cool for something like 10 bucks.
If all that is not your thing, starting on Saturday morning in all the neighborhoods they have block parties, shit like going from point a to point b locally, and people is just playing music, drinking, dressed up, whatever. Some of this mini people parade are prepared beforehand and registered with the city or some just improvise on the spot. This is what people like the most, they just go out, dress up dress down (its Summer hot) whatever, get drunk, dance. I think last year they reported there were over 2000 of this smaller parties around the city during the holiday. Saturday-Monday are heavy days, heavy drinking, heavy dancing, heavy walking, by Tuesday everybody is dead and just rest for a day or two.
The carnaval in Salvador, Bahia is very awesome. They forgo all that samba school bullshit and just party for 5 days straight. Its more a street thing with live music shows. Hell of good time. Salvador and Bahia in general is very negro, highest population of blacks in the country, their parties their music is very African influenced. In my opinion its much better than the Rio one, but I like all these African shit, most Brazilians themselves prefer it also. I would make my way to Salvador sometime on Monday.
Where to stay anywhere in the south zone beach area. Any hotel in this neighborhood would be OK...
Ipanema
Copacabana
Leblon
Sao Conrado
Leme
Lagoa
Gavea
Things to see I don't know if you like doing the turisty stuff. I can make you a list.
Whore houses?

That shit is illegal man

Truly man there's tons of places. But technically they ARE illegal, some get shut down if they don't pay protection tax and shit, shit's always evolving. Trust me finding it won't be a problem at all. Beware on getting drug, kidnappings are a serious danger.
Soccer gets moved to Friday and Saturday on carnaval weekend, so keep that in mind. The famous Maracana stadium is closed for constructions improvements for the 2014 WC. The Engenhao stadium is being used for Fluminense, Flamengo and Botafogo matches. Matches return to normal on the following weekend.
If you're going to go around the country, I can recommend you some places.
Sorry I was out all day, just saw this.