The backslash has no special meaning in SQL, so '\n' is a backslash followed by the character n
To use “escape sequences” in a string literal you need to use an “extended” constant:
select 'test line 1'||E'\n'||'test line 2';
Another option is to use the chr() function:
select 'test line 1'||chr(10)||'test line 2';
Or simply put the newline in the string constant:
select 'test line 1
test line 2';
Whether or not this is actually displayed as two lines in your SQL client, depends on your SQL client.
UPDATE: a good answer from @thedayturns, where you can have a simpler query:
select E'test line 1\ntest line 2';