first, add MouseListener and MouseMotionListener to your JPanel.

in MouseListener.mousePressed you must save pressed point (pressPoint)
in MouseMotionListener.mouseDragged you save your dragged point. (dragPoint)

you need also one variable to save last dragged point. (oldDragPoint) and
call repaint();

in JPanel.paintComponent you first call super.paintComponent then
you set g.setXORMode(Color.<youLike>)
g.drawRect(pressPoint.x, pressPoint.y, pressPoont.x - oldDragPoint.x,
pressPoint.y - oldDragPoint.y);
g.drawRect(pressPoint.x, pressPoint.y, pressPoont.x - dragPoint.x,
pressPoint.y - dragPoint.y);
oldDragPoint = dragPoint;
g.setpaintMode();

thats it!

PS. its somebit symplyfied. may be its better if you instead of drawing one
rect draw 4 lines.
I experienced that in xor mode it could be pretty slow if rectangle is big.