"OK, so what about racial slurs, if say I have a character referring to himself using the n-word?"

I think that sort of thing can be handled appropriately. However, the test I would put it to as a Chinese-Australian (or Australian-Chinese) is fairly simple.

If you read a story referring to 'chinks' or 'slants', how would that make you perceive the writer or the writer's intent? And more importantly, how would it make you feel inside?

Answer that and you answer your question, imo.