bjdArch:
All of Spain goes on holiday every summer for the month of August. That actually is good news because it makes the traffic less intolerable. The month holiday actually begins with St James (Santiago--Spain's patron Saint) Day on July 28th.
Must sees: 1) The Prado--art museum, Goya, Vallesquez, Rubens, Picasso, Bruegel, etc. 2) Retiro Park--Along with Hyde Park and Tiergarten, one of the finest city parks in the world. 3) A Bullfight, just to say you have seen one. 4) And two short day trips--one to Toledo, and one to the Valley of the Fallen. Your concierge can help you arrange transport.
Definitely eat at Botin's (of Hemingway fame) it's one of the you gotta do it things. Also enjoy the tapas (bar snacks) at the little bistros. If you stop at one of the sidewalk cafes, and they bring something you didn't order, BE SURE THAT THE WAITER UNDERSTANDS THAT YOU DO NOT WANT IT AND YOU WON'T PAY FOR IT. The difference between the two is that when you are having tapas, you are standing up. At the sidewalk cafe, you are sitting. (It's a little more complicated than that, but the rule works).
Taxis are reasonable, manned by competent drivers, and exciting. The Metro (subway) works and is inexpensive. Thievery is a problem. The key there is to be alert to what's around you, and make the thief think that you and your family are not the easiest victims. As a group, thieves do look for the easiest targets.
I lived in Madrid for three years, and still go back occasionally. You and your family should have a good time. All my best!
--WauseonFox--