Oh one more thing. Would you choose Bahia over Buzios? Or is there even another place/beach that would be better? In Buzios I think we can stay at Cas Brancas Boutique hotel & spa.

Buzios and Trancoso have a totally different character, as I mentioned above. I happen to prefer the latter, but I suspect I am a very different type of traveler than you. All of the properties you mention for both locations are quite nice.

Thank you VidaNaPraia! It seems that EVERYTHING is booked over the New Years weekend except for the Sheraton which as I checked into it more does not get very good reviews. i am ready to give up! Trancoso also is booked so we can't do it the other way around.
Thank you for the recommendations and the guide. If I can find a hotel in Rio I will do it and Trancoso. I have no idea how to get there but these are minor details The Etnia sounds a bit bohemian to me. We do like luxury, what can I say. But people do recommend it!

Not surprised at all to read that most places in Rio are already full for Reveillon. You really have to book around July to have any choice. Anyplace that is popular (read anyplace that has ever been mentioned in a guidebook in English or Portuguese)is likely to be booked early, since Brazilians like to travel at this time too.

As far as Trancoso, the easiest would be to fly from Rio to Porto Seguro. Get a taxi from the airport, probably not cheap; there is a small back road that avoids crossing the river by ferry. It's about 13 miles from Porto Seguro, but I think you may have to have to backtrack somewhat to get to the turnoff to the little backroad.
Or maybe the hotel can arrange a car.
Otherwise, take a taxi or bus to the ferry dock. Then take the balsa (ferry) across the Buranham river to Arraial D'Ajuda and get bus/taxi to Trancoso there.
(I have local friends with a car so I have never used any public transportation there.) It's relative remoteness is part of it's charm.

On the other hand, Buzios is a few hours by road from Rio.

Okay, so we can find two hotels for New Years weekend! One is in Saint Theresa and the other is on Atlantica Avenue. I was thinking that the Atlantica might be better located but St Theresa sounds lovely. We can also find something in Buzios for before New Years. So the thought is to fly into Rio and either spend a day or two and than go on to Buzios or go directly to Buzios returning to Rio for the New Years weekend before we fly home for 4 days.

Any thoughts on any of this?

Thanks so much for your help!!

This should give you a good idea of Reveillon on Copacabana beach:
http://www.360cities.net/image/reveillon-at-copacabana-beach-2008#0.00,0.00,70.0

Santa Teresa is a charming neighborhood of lovely buildings set on top of a hill. The bondinho trolley that was one main form of transportation up the hill is not running (due to an accident a few months ago), so you would have to taxi up and down the hill (and some taxi are reluctant to go up) every time, or take one of the buses. There are some nice restaurants, shops, and places to stay, but it would IMO be considered a gentrifying neighborhood in which not every street is safe to walk. Nice place to take a day trip, eat at Aprazivel, look at some very good quality craft shops, have a drink at Bar do Mineiro, and see the Chacara do Ceu museum.

The view from Santa teresa over the city:
http://www.360cities.net/image/02-foto-aerea-360-do-solar-real-santa-teresa-rio-de-janeiro-brasil#0.00,0.00,70.0

Part of the neighborhood, showing the bondinho tracks:
http://www.360cities.net/image/largo-dos-guimaraes-santa-teresa-rio-de-janeiro-brasil#0.00,0.00,70.0

Before you plan Rio vs. Buzios (first, middle, or last), check the multi-night packages (usually Dec. 28-Jan 2)for Reveillon that are most common at Rio hotels and might effect those plans.

Here's Av. Atlantica as seen from one of the kiosks on the sidewalk next to the beach:
http://www.360cities.net/image/av-atlantica#-85.42,-18.64,70.0
(I think the tower that has the blue Othon sign is the Othon Palace hotel. The chain has several Rio properties.)
That location is quite convenient to all sights and for the fireworks.

And a bit of Buzios:
http://www.fotobolha.com.br/tourvirtual/Buzios%20Tour/index.html

Thank you for the photos. In the photo Buzios looks a bit run down. Is this the case? How does one know what the star rating is in Brazil?